Easy Accountancy
Nationwide, low-cost, friendly accountants
Self Employed Guide to running your
own business Telephone: 0500 234111
email: info@easyaccountancy.co.uk
Self Employed Guide
To running your own business
Welcome Here at Easy Accountancy we believe that your accountant should do a lot more than just complete your tax return or tell you how your business is doing – they should help you identify opportunities to improve your income, and then support you in trying to realise them. Our watchword is ‘commitment’. We take our clients’ interests to heart and strive to be proactive, recommending value added solutions whilst maintaining outstanding customer service. Of course we can take care of all of your personal and business tax needs, thereby freeing up valuable time and resources for you to devote to running your business, but we are also committed to going the extra mile. Please accept this Self Employed Guide with our compliments - we hope you will find it interesting and informative. We have tried to make it as easy to read as possible, but some of the subjects covered, for example tax and VAT, can get quite complex. As a client, you will of course have unlimited access to your own dedicated tax expert who will be able to discuss any issues with you by phone or email. If you have any questions about being self employed or would like any further advice please call us on 0500 234111 or 01442 275767, or email heather@easyaccountancy.co.uk. This guide is a unique toolkit which has been designed to help you get more out of your business as a self employed business owner, whether you operate as a sole trader or through a Limited company. It explains Easy Accountancy’s experience in supporting thousands of small businesses across the UK and covers the following key areas: • • • • • • • • • • • • • • • • • •
Tax Jargon Buster About Easy Accountancy Becoming self employed How to set yourself up as self employed Sole trader vs Limited company Take home pay Self employed FAQs Limited company FAQs Expenses Admin issues Does IR35 affect sole traders? VAT and the Flat Rate Scheme Tax Accounts made easy Managing your money Finding work and growing your business Managing your pricing Guide to HMRC forms
Please note - rates of taxation are subject to change. This guide is for information purposes only and we always suggest seeking professional advice from an accountant.
Easy Accountancy
Nationwide, low-cost, friendly accountants
Speak to one of our friendly accountants: 0500 234111 | info@easyaccountancy.co.uk
1
Self Employed Guide
To running your own business
Contents 1. About Easy Accountancy
3
Our reputation
3
Why choose Easy Accountancy?
4
2. Tax Jargon Buster
6
3. Becoming Self Employed
9
4. How to Set Yourself Up as Self Employed
16
5. Sole Trader vs Limited Company
19
6. Sole Trader vs Limited Company Take Home Pay
21
7. Self Employed FAQs
22
8. Limited Company FAQs
25
9. Expenses
28
10. Admin Issues
30
11. Does IR35 Affect Sole Traders?
33
12. VAT
34
13. The Flat Rate VAT Scheme
36
14. Tax
38
15. Accounts Made Easy
44
16. Managing Your Money
48
17. Finding Work and Growing Your Business
54
Marketing
54
Basic marketing tools
55
How to get to number 1 in Google (this is obviously a guide and not a guarantee)
59
Sales
65
How to Generate Leads for Free
66
Time management
67
18. Managing your pricing
68
19. Guide to HMRC Forms
70
About Easy Accountancy
71
Easy Accountancy
Nationwide, low-cost, friendly accountants
Speak to one of our friendly accountants: 0500 234111 | info@easyaccountancy.co.uk
2
Self Employed Guide
To running your own business
1. About Easy Accountancy Easy Accountancy uniquely offers a low priced fixed fee accountancy package with a friendly approach. We specialise in offering accountancy services to the self employed, freelancers, sole traders and small business owners. Our approach towards our clients is very simple, we remove the stress of managing your finances, leaving you to concentrate on making a success of your business. We understand that administrative responsibilities such as managing your business finances or completing Tax Returns can be a real burden. Our aim is to make your life easier by taking on the very tasks which can sometimes make the decision to start a small business a difficult one. Our accountancy package includes:
• Unlimited telephone and email access to your own dedicated accountant - no call centres, no outsourcing and no ‘press one for this or two for that’. • An all-inclusive package starting from just £30 plus VAT per month - covering all your business and personal tax needs for a fixed monthly fee which is one of the lowest in the market. Each of our fixed fee packages is tailored to your needs. For example, you may not require a payroll service or a VAT return but would still like accounting support and tax advice throughout the year plus your annual return completing. Whichever package you choose, you can guarantee, our low-cost, all-inclusive fixed monthly fee means that you’ll never have to worry about any additional costs, so you can call your accountant for advice and never have to worry that you could receive an unexpected bill for the privilege afterwards.
Our Reputation Easy Accountancy is the sister company of SJD Accountancy, the UK’s largest accountancy firm for contractors and freelancers, with over 12,500 Limited company clients and also one of the largest accountancy firms in the UK. SJD has been supporting contractors, interims, freelancers, engineers, consultants and small business owners since 1992 and it is the only truly national contractor accountant, with offices all across the UK. SJD has more qualified accountants than any other firm in its market, covering the following major tax and accountancy bodies: ATII, ATT, ACCA, CA, ACA, FCCA, ACMA.
Easy Accountancy
Nationwide, low-cost, friendly accountants
Speak to one of our friendly accountants: 0500 234111 | info@easyaccountancy.co.uk
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Self Employed Guide
To running your own business The SJD Group has won more awards for customer service and accountancy excellence than any other firm in its markets, including:
• Winners of the Accountancy Age Awards for Excellence in 2011, 2007 and 2004, and finalists in 2012 and all years since 2003 • Voted by visitors to www.contractoruk.com as the ‘Best Contractor Accountant’ from 2006 to 2012 • The only contractor accountants to win two national customer service industry awards, as presented by the Institute of Customer Services and the UK Customer Experience Awards • Awarded the Sunday Times ‘Best Small Company to Work For in the UK’, achieving the highest position ever for a firm of accountants • PCG (Professional Contractors Group) Accredited Accountants • APSCo members (The Association of Professional Staffing Companies) - completing their compliancy audit in 2011 • Finalists in the 2010, 2008 and 2007 ‘AXA Business of the Year’, as awarded by the National Business Awards sponsored by Orange
Why choose Easy Accountancy The most daunting thing when running your own business can be finding an accountant who can help you with numerous questions and queries, for example:
• • • • •
Advice on expenses, tax allowances and take home pay How much you should put aside for your tax bill Whether you should register for the Flat Rate VAT Scheme If going Limited would be beneficial If you have a life plan and wish to go travelling, what’s the most tax efficient way to run your business
With many accountancy firms, it is likely you will be charged every time you call them, or even every time they send you a letter. So by the end of the year, you could easily be looking at a substantially higher overall bill then you expected. Accountants, just like you, have to account for their time and typically charge in six minute slots and once the time gets to an hour they’ll usually send an invoice. So it’s no surprise that most small business owners soon stop calling their accountant and instead seek advice from friends, family and colleagues, which is not an ideal situation considering the complicated rules surrounding tax. This is where Easy Accountancy fits in. We don’t want our clients to be scared to contact us and potentially lose out on valuable tax saving advice. It’s even more important when you first start out, as you really need to set your business up in the best way possible. You’ll probably have loads of questions and will really appreciate the fact you can call your accountant as many times as you like, without the fear of racking up large bills.
Easy Accountancy
Nationwide, low-cost, friendly accountants
Speak to one of our friendly accountants: 0500 234111 | info@easyaccountancy.co.uk
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Self Employed Guide
To running your own business Rather than charging an annual fee and unknown extras throughout the year, we charge a low cost all-inclusive fixed monthly fee, so you never have to worry about calling your accountant and then receiving an unexpected bill. If you do not operate through a Limited company, our fees start from just £30 plus VAT per month. If you do operate as a Limited company, we offer bespoke fixed fee packages. Every Limited company is different and, as accountants, we know that you’ll need peace of mind about your finances. We’ll look after all your accountancy needs, leaving you free to run your business. All our fixed fee packages include:
• • • • • •
Proactive, ongoing tax advice throughout the year Year-end accounts Help in dealing with HMRC Personal tax returns Free bookkeeping software Unlimited telephone and email access to your own dedicated accountant
• Emails received by 4pm on any normal working day will be replied to the same day • Letters will be answered within two days of receipt • Subject to all the appropriate information having been received from the client, draft Annual Accounts will be submitted for approval within four weeks • All new clients will be contacted by their accountant within two days of signed contracts being received • Client/accountant ratio will be maintained at a constant level to ensure no loss of personal service • All accounting work will be carried out in-house by suitably qualified people • Should it be necessary for you to leave a telephone message, it will be answered same day or the following day at the latest Claire Johnson Managing Director Easy Accountancy If you have any questions about being self employed or would like any further advice please call us on 0500 234111 or 01442 275767, or email heather@easyaccountancy.co.uk.
Easy Accountancy
Nationwide, low-cost, friendly accountants
Speak to one of our friendly accountants: 0500 234111 | info@easyaccountancy.co.uk
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Self Employed Guide
To running your own business Tax Jargon Buster a) For business owners operating as a sole trader Bookkeeping For most freelancers and small businesses this simply means recording your income from clients you have invoiced each month, and recording your outgoings on any business-related expenses. Expenses are then deducted from income at the end of the financial year to determine your taxable ‘profit’. Expenses HMRC states that expenses can be offset against tax if they are ‘wholly and exclusively’ for the purposes of your business. However, if you have expenses that are part business and part personal, like your mobile phone for instance, then you can just offset a proportion of the cost that is business related. FRS The FRS, or Flat Rate VAT Scheme, is designed to simplify your VAT responsibilities - if you are VAT registered. If you then also register for the FRS, you charge VAT at the current rate, but only pay it back at a lower rate. HMRC Her Majesty’s Revenue and Customs was previously known as the Inland Revenue and is the UK Government department which is responsible for the collection of UK taxes. This is where your self assessment Tax Return will need to be sent each year. NICs This stands for National Insurance Contributions. As a freelancer, you still have to make these contributions, to make sure you remain entitled to certain state benefits. PCG The Professional Contractor’s Group is an association that protects the interests of freelancers and contractors. Professional Indemnity Insurance This is an insurance policy that some self employed people choose to take out, which is designed to cover you if a case of professional negligence is brought against you. Public Liability Insurance This is an insurance policy that some self employed people choose to take out, if appropriate to their business. It is designed to cover you if any injury or damage caused to a member of the public during your work activities. VAT Value Added Tax, or VAT, is charged on most goods and services offered by VAT registered businesses in the UK. Umbrella Company An umbrella company is an organisation that acts as an ‘employer’ for self employed people who work under a fixed term contract assignment.
Easy Accountancy
Nationwide, low-cost, friendly accountants
Speak to one of our friendly accountants: 0500 234111 | info@easyaccountancy.co.uk
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Self Employed Guide
To running your own business b) For small businesses operating through a Limited company Certificate of Incorporation A certificate which displays your company number and details, which you will receive once your Limited company has been registered and formed. Companies House Incorporated companies in England, Wales, Northern Ireland and Scotland are registered at Companies House. Company Director If you are working through your own Limited company, then you will be the only Company Director. Company Secretary Following a change in legislation, as of 6th April 2008 there is no requirement for a company secretary - so if you have read anything about needing to appoint one as part of becoming a Limited company, this is no longer needed. Corporation Tax This is the tax which is paid on any profits made by your Limited company. Dividend These are the payments which you make to your ‘shareholder’ - this is yourself - out of your profits, after corporation tax has been paid. EBT Employee Benefit Trusts are used to minimise tax. They are often through an offshore scheme and when used inappropriately HM Revenue and Customs will challenge their use. IR35 This is legislation which aims to stop people working as a Limited company in ‘disguised employment’, where they are receiving the same benefits as an employed person. It is important to ensure that, if you only have one client, your working arrangements do not fall within IR35. Limited Company Is a legal form of company that will provide you with ‘limited liability’ as its director. Memorandums and Articles of Association These are the documents that show the share capital and terms and conditions of your Limited company. MSC An MSC or Managed Service Company is one which takes over the running of a self employed person’s Limited company in order to reduce tax liability. There is now legislation in place to prevent their use. PAYE ‘Pay As You Earn’ or PAYE is income tax which is deducted from salaries before they are paid - which, in the case of the self employed, just relates to your own salary which you pay yourself out of your Limited company.
Easy Accountancy
Nationwide, low-cost, friendly accountants
Speak to one of our friendly accountants: 0500 234111 | info@easyaccountancy.co.uk
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Self Employed Guide
To running your own business Section 660a This is legislation to prevent income shifting. Shareholder/Subscriber With small businesses that have more than one party who is financially involved, dividends are distributed to the shareholder(s) of the company. Each shareholder then receives a percentage of the payment each time a dividend is made.
Easy Accountancy
Nationwide, low-cost, friendly accountants
Speak to one of our friendly accountants: 0500 234111 | info@easyaccountancy.co.uk
8
Self Employed Guide
To running your own business 3. Becoming Self Employed There are many different types of self employed people, but the two main ones are those who set up a small business - for example a mobile hairdresser, a restaurant owner, a plumber or an electrician - or someone who works ‘freelance’. This means providing a service or a skill set which their clients could choose to gain access to by taking on an employee instead, with all of the expenses and responsibilities which that brings. There are many reasons why people choose to become self employed. For example, you have the option to take on as many clients, or as many projects as you like – with total flexibility in your business structure. As well as the flexibility, self employed people also have the ability to command much higher hourly rates of pay than permanent employees – especially if they are prepared to put in the extra hours. But this is not unreasonable, bearing in mind the lack of holiday and sick pay, and the other additional benefits which are lost when moving from permanent employment to being self employed. a) Full time or part time? Many new business owners opt to ‘test the water’ by working in their spare time to start with, whilst also remaining in full time employment. This gives them the option to see if being self employed is viable, before giving up the day job! This is a potential route into working for yourself, but there are a couple of possible downsides. The first thing to bear in mind is that it might be slightly harder to win new work, whatever you are doing, if you can only be contacted outside of normal business hours. A prospective customer could perceive this as you not being committed to your new business, or to them! The extent to which this affects you will depend upon the type of business you are thinking of setting up and who your target audience is. If you are aiming to attract business customers it will be more of an issue, but if you are aiming to attract consumers, they are likely to be more forgiving of your other commitments and your lack of time flexibility. The advice contained in this guide will be relevant whichever route you take. However, if you do plan to stay in employment to start with, we would always advise that you make your employer aware of what you are doing in case of any potential conflict. Many employers’ contracts have a clause about disclosure of other work, be it self employed or employed. b) Advantages and disadvantages Whatever your industry sector or type of work, there are numerous advantages to be gained by becoming self employed. Many of those listed below relate mainly to people within the freelance world, but some do also relate to other types of self employed business owners: c) Financial benefits • An average self employed rate can easily be double or triple that of a full time employee, or even more. • Self employed freelancers are paid higher rates due to the flexible nature of the relationship and the fact that many projects can be relatively short-term, although this isn’t always the case as some client relationships can last for years. • Depending on your individual skills and on the state of the industry in which you work (or the market in general) you can command very high rates of pay.
Easy Accountancy
Nationwide, low-cost, friendly accountants
Speak to one of our friendly accountants: 0500 234111 | info@easyaccountancy.co.uk
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Self Employed Guide
To running your own business • As a self employed freelancer, you are paid for every hour that you work, as well as having the opportunity to work as many hours as you choose each week. • You can work for multiple clients at the same time, on many different projects, which can also increase your pay. • If you take professional advice, you can generally reduce your tax bill significantly. • You can offset all of your business expenses against your income to further reduce your tax bill. d) Flexibility • As a self employed person you are, in effect, your own boss - something which can be very satisfying and extremely enjoyable. • You have the ability to be far more independent than permanent employees. • You have the freedom to work when you choose, where you choose (depending on available work of course) and for however long you like. • There is a direct link between work effort and reward, which sometimes doesn’t exist when you are an employee. • You can take as much or as little holiday as you prefer - as you sign your own holiday form. • The companies you work for are not your employers, but are instead your clients, which puts a whole different flavour on the relationship - as you will be treated more as an equal and less as a member of staff. • Working on a self employed basis will give you much more flexibility when it comes to agreeing conditions and terms. • You have more flexibility over the payment terms that you can negotiate. • You have the opportunity to develop your career in a way that suits your personal circumstances at any given time. e) Skills Development • As a self employed person you will work on many different projects and for many different companies or customers, and this will help you to build a unique range of skills and experience. • Working for yourself gives you the opportunity to maybe test out other industry sectors to see if you can widen your experience. • If working for other businesses, you tend to gain a really good insight into different company cultures, processes, operations and structures. • You have the ability to build up a wide-ranging CV and to establish an extensive list of client references. • You will become known within your own field for your excellent work and you may even find that your services become sought-after, rather that you having to pitch for work all the time. • Carrying out work in different organisations or for different customers gives the opportunity to develop existing skills and to learn new ones.
Easy Accountancy
Nationwide, low-cost, friendly accountants
Speak to one of our friendly accountants: 0500 234111 | info@easyaccountancy.co.uk
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Self Employed Guide
To running your own business • You will be exposed to many different styles of working, not only in relation to your peers, but also in relation to your clients and your suppliers - and this helps you to develop as an individual in more ways that just your core skill set. • You may gain added experience of different types of products and/or services which will all widen your experience and make you more interesting to future clients. • Self employed people often come into new roles as the ‘industry expert’, which is not only a nice position to be in, it also adds to your credibility as a professional and widens your experience further. • Working for different clients gives you the ability to advance your career and your knowledge without being limited by a single employer’s processes, procedures or business ethos. f) What about the negatives? No-one likes talking about the downsides of running your own business, but you will feel far more prepared if you know a little about some of the disadvantages of being self employed before you start. So we thought it would be worth mentioning them here so you have a complete view: • You are responsible for finding your own work and making sure that the money keeps coming in. • You will also be responsible for negotiating your own hourly or day rates, which is something that you may not be familiar with in the early days. • There is less security than you would have as a permanent employee, and some people find this difficult to handle until they become established. • Even in a buoyant market, there is always a level of uncertainty about where the next customer is coming from. • Self employed people don’t get the same benefits and ‘perks’ that permanent employees receive. • There is no sick pay and no holiday pay, so it’s vital you manage your finances to cover for these times. • Not having traditional ‘colleagues’ can be lonely if you are used to this environment and there are a lot of things you will have to deal with alone, which is why it is important to build up a good support network of experts around you who can help you to manage all aspects of your business effectively. • You are responsible for managing your own finances - for example things like tax, VAT and National Insurance contributions - which can be a daunting prospect. • You will be ultimately responsible for completing all of the paperwork, filling in forms and paying your taxes on time, every time - and this can be overwhelming until you know what you’re doing. • At some point you will have to decide whether to set up a Limited company and this can be confusing. Many of these later issues can be addressed, and eliminated altogether, by finding a good accountant - who can help you not only with paperwork and form filling but also with some sound business advice.
Easy Accountancy
Nationwide, low-cost, friendly accountants
Speak to one of our friendly accountants: 0500 234111 | info@easyaccountancy.co.uk
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Self Employed Guide
To running your own business The following infographic may also be of interest, please click on it to see a larger version:
Easy Accountancy
Nationwide, low-cost, friendly accountants
Speak to one of our friendly accountants: 0500 234111 | info@easyaccountancy.co.uk
12
Self Employed Guide
To running your own business g) Choosing a company name When operating as a sole trader, it’s not essential to have a name for your company - but if you’re going to register as a Limited company, then this is a legal requirement. Either way, you still of course need to call your business something, so that you have an ‘identity’ which people will recognise. This could just be as simple as just your own name, or of course there are a million and one other options. Even if you are starting out as a sole trader, it is worth thinking about a name in the context that you might one day want to go Limited and hence have to register the name with Companies House, so that you are covered either way. In fact, it may even be worth actually officially registering the name, even if you don’t then immediately start operating as a business. As soon as you do start trading and building up a client base and a good reputation, all of a sudden that name, or ‘brand’ becomes worth something and it’s even more important that it is protected – and also that it is as unique as possible. i) Choosing the name This sounds like it should be easy! In fact, if you’ve been thinking and dreaming about setting up your own business for years, you may already have a name in mind that you’ve always wanted to use. But in reality there are many factors to consider before making a final decision. The first of these, of course, is whether the name is available – as no two businesses can have the same legal name. You should also ensure that it is not similar to a word or phrase which has already been registered as a trade mark, so there’s no point in choosing Moca Cola or IBBM Computing! You will need to search for existing company names that are the same or similar, and you can do this using the National Business Register. For an easy way to search, please visit the website of our sister company SJD Accountancy and use their free company name checker. ii) Descriptive or abstract? This is a really important decision that you have to make. Large organisations have spent literally millions of pounds when choosing or changing names, and the ‘brand development’ agencies which carry out these projects can spend weeks, if not months, deliberating on the right approach for an individual business. Your job should be far simpler, but this is still a vital one to decide upon. A ‘descriptive’ name makes it immediately obvious what your company does. For example, ‘Freelance Marketing’ or ‘Smith’s Professional Wedding Photography’. But these names can be cumbersome and hard to remember, as well as being far more likely to be already registered – or at least similar to another company that is already registered. The alternative therefore, and something which has become far more popular in recent years, is to go for an abstract name which means nothing - and then to develop a ‘brand’ around it, so that people eventually associate your company, and what it does, with that name. The advantage of this approach is that it is also far easier to find a suitable domain name that ends in com. At the top end, organisations spend millions going through this process. Take telecoms giant Avaya for example. They changed their name after being spun off from parent company Lucent Technologies - a name which, although not 100% obvious in itself, at least told people that it was a technology company. When it rebranded as Avaya, part of that decision was to spend an awful lot of money carrying out what is known as ‘brand awareness’ advertising, so that people eventually knew what it did just by seeing the name – a marketing programme which included sponsoring the 2006 World Cup!
Easy Accountancy
Nationwide, low-cost, friendly accountants
Speak to one of our friendly accountants: 0500 234111 | info@easyaccountancy.co.uk
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Self Employed Guide
To running your own business Back in the real world however, no small business has that kind of budget, or expertise – and so a great alternative is to add a strap-line to your logo which tells everyone what you do. Even Avaya did this, adding the word ‘Communications’ under the name for the first few months. This gives you the opportunity to choose a nice abstract name which is also memorable and then just explain what you do underneath! For example ‘Zoomla – Professional Wedding Photography’. The name you choose could be a totally made up word, or it could be an existing word but one which is not related to your business. For example, back in the late 90s, Scottish Telecom rebranded as ‘Thus’ – a name which is now pretty well known and associated with that business. Either option is fine, as long as you can find a name that you like and that, ideally, you can just add .com and .co.uk to, to form your catchy and memorable domain name. iii) Foreign and ‘PC’ sensitivities When selecting a name, you also need to consider any other sensitivities which might cause a negative impact. Some people think that we live in a world where ‘Political Correctness’ has gone mad (who can forget ‘Baa Baa Rainbow Sheep?’) – but even if you think it is all taken a bit too seriously, for the purposes of your company name, it’s best to err on the side of caution and to avoid any names which might offend someone. The other thing to consider, especially when choosing an abstract name, is that it might mean something else in a foreign language. Granted, you may never plan on trading in that country, but there could still be negative implications if the name you choose means something derogatory, contentious or just downright embarrassing in another language. One of the most famous, although in this case partly due to a slight mistranslation, was the name Coca Cola – which, when translated into Chinese, read ‘Bite the Wax Tadpole’. More simply - and not even due to translation, but just to different terminology - is the now-global brand of Australian sports shoe shops ‘The Athlete’s Foot’, which has some rather unpleasant connotations here in the UK. iv) Making sure your name is web friendly As outlined above, any name you choose must be able to be used as a domain name. Having a website domain name that is different to your company name just causes confusion, and unless you are a huge brand, is best avoided. B&Q might get away with www.diy.com but that’s the exception. This is made slightly easier by the fact that you can have hyphens in your domain name, but remember that you will be saying either the web address, or your email address, over the phone many times - so you need to make sure it’s easily understood. A name with lots of hyphens between words can be quite hard to communicate verbally. When thinking about your company name from a web perspective, it’s also worth thinking about how ‘SEO friendly’ the name is (Search Engine Optimisation - which simply means how easy it is for Google/Bing/Yahoo to find it). If you do opt for a descriptive name, then you might find that people use that search phrase more generically when looking for the type of services that you provide – and that you might gain an advantage as they are in fact searching for your company name. Having said that, this should not be a deciding factor when choosing a name, as many other companies will probably use the same phrase as one of their ‘keywords’. One last thing to consider when choosing your name is that domain names are often written all as one word and, whilst you might know what it is meant to say, it could read quite differently to someone who’s never seen it before. One of the most well known examples of this is the well-known online technology forum for IT specialists Experts Exchange – whose web address is www.expertsexchange.com. Think about it . . . For more information on choosing a domain name please have a look at our easy to read article on Setting up your company website on our own site.
Easy Accountancy
Nationwide, low-cost, friendly accountants
Speak to one of our friendly accountants: 0500 234111 | info@easyaccountancy.co.uk
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Self Employed Guide
To running your own business v) Impressing investors At some point in the future you might want to consider applying for external investment into your business, and at this point you’ll need to come across as being very professional and businesslike. So think carefully now before choosing an outrageous, contentious or even slightly risqué name. Investors might not take you seriously and might be less than thrilled about handing over a cheque with such a bizarre name on it. If you are set on this approach then register a more ‘safe’ legal name and then operate using a more trendy one if you must. Many businesses go down the ‘trading as’ route, or simply use more memorable variation of their names as an outward facing brand. French Connection Limited’s FCUK brand is a classic example of this. vi) Registering your chosen name Once you have chosen your company name and have determined that it is available, you can then register the name and set up your Limited company. There are many organisations that can help you with this, including Easy Accountancy of course. Have a look at the Form a Limited Company page on our website for more information. Costs for this service are just £125 + VAT, which is one of the lowest fees in the marketplace. If your chosen company name is available, we should be able to send out your certificate of incorporation within three hours of registration.
Easy Accountancy
Nationwide, low-cost, friendly accountants
Speak to one of our friendly accountants: 0500 234111 | info@easyaccountancy.co.uk
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Self Employed Guide
To running your own business 4. How to Set Yourself Up as Self Employed Setting up in self employment is not anything like as scary as you might think. Whether it’s a definite career choice, or something you might be considering due to redundancy, the decision to become self employed could well be a very good move. Becoming self employed as a sole trader is far simpler than setting up a Limited company - although this can have its advantages also, and some of our clients do choose to do this. For now though, we will concentrate on setting yourself up as a sole trader. Regardless of how you operate, if you are not registered as a Limited company then you are classed as a self employed ‘sole trader’ in the eyes of HMRC. This section is primarily aimed at people who are operating as freelancers or who are self employed and have multiple clients - but much of it will also be relevant if you are working as a contractor with just one client. Once you have made the decision to become self employed, there are three key things that you need to do next: 1) Register as self employed It’s important to let HMRC know that you are self employed as soon as possible after you make the decision - even if you already fill in a Self Assessment Tax Return each year. You can do this online by filling in the snappily titled ‘Registering for Self Assessment and National Insurance contributions if you are a self employed sole trader’ form. This must be done within three months of setting up the business. If you don’t tell them, you may have to pay a penalty. You can let HMRC know about your self-employment by registering online for business taxes. You’ll be asked for information about yourself and your business, and then HMRC will set up tax records for you using the information you provide. This means that you will be on their systems as needing to fill in a Self Assessment Tax Return each year, and to pay Class 2 National Insurance every six months. A Self Assessment Online account automatically will be set up for you at the same time, unless you say that you don’t want one - but it is advisable to have this. 2) Budget for tax and NI As soon as you send in your first invoice and then receive your first payment, you need to ensure that you don’t think of all of the money as income that you can spend, but instead put a percentage of it aside for tax and NI. As a guide, 30% is a comfortable figure or 25% as a minimum, but you will be able to adjust this over time as you get a feel for your likely tax bills. This will ensure that, when you receive tax and NI bills, you will have the money available to pay them. As a self employed person this is especially important, as your tax bills will be sent twice a year (on 31st January and 31st July) and so it may be a while before you get the first one. Never make the mistake of not putting anything aside, or you will be in for a nasty shock when the bill comes in. At the end of the tax year (5th April) you will need to create a full set of income and expenditure figures. From these, you or your accountant can then work out your tax liability and what your ‘payments on account’ will be for the following year. These are the July and January payments and are calculated for the following year based on your income in the previous year. You will still need to fill in a normal personal Self Assessment Tax Return and the timescales for completion of this are the same as for an individual. However, the sooner you do it after 5th April, the sooner you will have an exact tax liability figure for the following year and can budget accordingly.
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Self Employed Guide
To running your own business 3) Keep financial records From day one, you must keep a record of every payment you receive and every business expense you incur, and you must keep these for six years. This is vital in order to ensure that, when you come to do your Tax Return (or give the details to your accountant) you have all the information you need easily to hand. This is much better than panicking three days before the HMRC deadline and having to rummage through piles of invoices and receipts! Our free bookkeeping software can help you keep financial records. Once you have informed HMRC, made sure you can pay your tax and NI bills, and created a process for managing your finances - you’re up and running. The three points above really do cover the basics, but there are a number of other ‘optional extras’ which you might want to consider on Day One as well: a) Register your business name As a sole trader, you do not have to register your business name in the same way as you would have to if you were setting up a Limited company - which means that technically you can choose pretty much any name you like! Having said that, if you do want to register the name as a formal business entity in the future - for example if you choose to go Limited at a later date - there may be some restrictions. So even if you are only setting up as a sole trader now, you might want to register your name, to protect it in the future. Also, by registering your company name straight away, your details will be present on the Companies House website, which provides credibility and helps to build client confidence. b) Set up a business bank account Again, as a sole trader you do not have to set up a business bank account, but most choose to do so. It is a good idea to keep your personal and your business finances separate, as it simplifies everything and makes it clearer to see what funds are where. c) Register for VAT You do not need to register for VAT unless you hit the VAT threshold, which is currently £79,000 for the year commencing April 2013. However, many people choose to register for VAT even if they are below the threshold, because it gives their business more ‘kudos’ with customers, or simply to make it appear larger than it really is. If you do choose to register for VAT, then there is the advantage of being able to claim the VAT back on everything you purchase for the business, but the ultimate benefit of this will depend on the type of company you have. If you buy things in and sell them on as part of your business function then it will be an advantage! d) Consider the Flat Rate Scheme Instead of registering for the standard VAT scheme, it may be more beneficial for you to register for the Flat Rate Scheme (FRS) instead. This could be especially beneficial if you have a service-based business, which does not involve the need to buy in many products or external services. Within this scheme, you charge your clients at the standard rate of 20%, but pay the government at a lower percentage. The reason for this is that the Flat Rate scheme simplifies VAT administration for HMRC and so the financial benefit is passed on, to a point. The rate you pay will vary depending on your business type. Different company types have different rates, and yours will depend upon the type of company you are setting up. You can find out the likely rate by visiting the HMRC website, but this will be assessed and agreed up front when you register for VAT.
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To running your own business e) Decide if you need an accountant Using an accountant will ensure that you do not put yourself at risk of incurring one of HMRC’s various penalties, and so end up having to pay the interest which is charged as a result of things like late registration, late submission of tax returns or late payments of tax. An accountant will also help you to manage your business finances correctly and to make sure that you are paying the correct amount of tax, as well as offering a wealth of help and advice on other finance-related issues. Easy Accountancy offers freelancers and small business owners an all-inclusive, low-cost, fixed fee accountancy package from just £30 plus VAT per month, including unlimited access to your very own accountant via telephone or email throughout the year, for help and advice. For more information on our service please call on 0500 234111 / 01442 275767 or email heather@easyaccountancy.co.uk.
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Self Employed Guide
To running your own business 5. Sole Trader vs Limited Company Having decided to become self employed, you have a major decision to make - whether to operate as a ‘sole trader’ or whether to set up a Limited company. There are of course a number of pros and cons to each route, but in simple terms - operating as a sole trader is simpler than going Limited, with less paperwork and less ‘legal’ issues to deal with, and it is a generally more straightforward way of running your business. Having said that, there are many situations where being a Limited company will sometimes be a distinct advantage. The bottom line is, managing your own tax affairs is complicated, so we’d always advise speaking to an accountant before deciding on which route to take. The following table outlines some of the key points to consider:
Sole Trader
Limited Company
No start-up costs or Limited company formation fees and very few forms to fill in. Simply choose a name, let HMRC know what you are doing, and start trading.
You’ll need to set up a Limited company, which is a legal entity, and to register your company name with Companies House.
Lower priced accountancy fees, if you choose to have an accountant.
Accountancy fees are generally more expensive, and definitely more necessary.
You can use your personal bank account if your business is small with simple incomings and outgoings.
You’ll need to open a business bank account which will involve potential charges, although many banks offer free business banking for freelancers and self employed people.
Your accounts are private and only visible to you, your accountant if you have one, and HMRC.
You have to file your accounts at Companies House each year, which will be on public record.
You’ll only need to submit a Self Assessment Tax Return each year which shows your income, expenditure and profits.
You’ll need to file formal accounts with HMRC and Companies House each year by a set date.
You simply pay personal income tax on your profit, which is your ‘income’.
You have to pay corporation tax on the company’s profits and will be liable for income tax on any salary you take.
You are personally liable for any business debts if anything were to go wrong and you couldn’t pay your creditors.
The company, not you, is liable for any business debts - unless you purposely manage your company incorrectly. So you should never be at risk of losing your house.
Your opportunity for more efficient tax planning is reduced and you may end up paying more tax overall.
Your tax planning opportunities are increased - for example, based on how much money you take out of the business.
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Self Employed Guide
To running your own business When making your decision, the first thing to think about is whether you expect to earn more or less than £25,000 a year. If you’re just starting out and don’t think you’ll earn more than around £25,000 per year then becoming a sole trader is probably right for you. Accountancy fees are lower and it’s far simpler to open and close your business. However, if you expect to earn over £25,000 a year, or if you already have a contract for work rather than just ad hoc business coming in, then a Limited company could be the way to go. There are many other reasons to consider going Limited as well - for example if you are worried about personal liability, or maybe if one of your clients is only willing to work with Limited companies.
You may also find our short video on ‘Sole trader or Limited’ helpful. (Please click the image to watch the video)
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Self Employed Guide
To running your own business 6. Sole Trader vs Limited Company Take Home Pay When deciding whether to operate as a sole trader or to set up a Limited company, another factor to consider is how much of your ‘billings’ - the money you receive from clients in return for the work you do - could actually end up in your back pocket. We say ‘could’ rather than ‘will’ as if you are a Limited company, it is actually up to you how much you take out of the business and how much you leave in. a) Sole trader As a sole trader, whether you use a personal bank account or have a business bank account, all of the money which comes into that account when your customers pay your invoices is yours to do what you like with. But at this stage, it’s vital to be organised about what you do with that money. As we mentioned earlier, it is essential that you put a percentage of your income aside to cover tax and NI - so that there are no nasty surprises when the bills come in. Whether you do this physically, by having a separate bank account, or just ‘virtually’ using a spreadsheet or other simple accounting package, is up to you. The key thing is that all of your income is allocated for different purposes. Think of it as a set of virtual jam jars on the shelf! One for tax, one for NI, one for living expenses, one for savings, and one for business expenses such as phone, stationery, internet and so on. The labels on these jars will vary depending on your personal circumstances but the principle is the same. By splitting your income in this way, you will always know what proportion of the money you have in the bank is available to be spent, and what must be saved to ensure you can cover all of these ‘liabilities’. b) Limited company As a Limited company the rules are quite different. All of the income you receive goes into your business account, which is totally separate from your personal account. The money then belongs to the business and is used to pay all of your business expenses. And one of these ‘expenses’ will of course be your salary. You can decide how much you take out of the business as salary or dividends, and how much you leave in - and this will determine the amount of tax you have to pay. So if you leave money in the business rather than taking it out you will reduce your tax bill. But this of course will depend on what percentage of your billings you need to live on - which is why sole traders and self employed people often choose not to operate as a Limited company. If you need everything you earn to live on, and run the business, then there are no tax saving to be made in this way. Again, this is why it is good to ask an accountant for advice. c) Take home pay calculator We have created a self employed take home pay calculator to provide you with an illustration of the amount you could take home if working as a sole trader. It assumes that you will claim 20% of your income as expenses, but as this is based on an estimate we would always recommend that you talk to an accountant for a more detailed illustration. The calculator can be found at: http://www.easyaccountancy.co.uk/about/self_employed_tax_calculator.html
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Self Employed Guide
To running your own business 7. Self Employed FAQs 1. How much tax will I pay being self employed? Unlike permanent employment, being self employed means that your clients will pay you the whole amount that you have earned, without any tax removed. So don’t be tempted to take all the money and spend it, as you’ll need to put some aside to cover your taxes. As a general rule, we recommend you put 30% of everything you earn to one side, and this should cover you for tax and National Insurance - but you will be able to adjust this over time as you get a feel for your likely tax bills. Your take home pay is your profit - i.e. your income less your expenses, tax and National Insurance. The following illustration shows what your likely take home pay might be:
Annual income
Annual take home pay
Monthly take home pay
£20,000
£15,366
£1,280
£40,000
£28,146
£2,345
£60,000
£39,295
£3,275
£80,000
£49,735
£4,145
As your tax is based on your profit after allowable expenses, you need to be sure that you are claiming everything you are entitled to – and an accountant can advise you on this. For more information, please visit our small business tax section on our website. 2. Do I have to pay National Insurance? Yes. If you are self employed you are responsible for making sure you pay your own tax and your National Insurance contributions. The norm is to pay Class 2 National Insurance Contributions which are paid every six months on 31st January and 31st July. This is at a flat weekly rate of £2.70 (2013-2014) and you will be sent a bill by HMRC every six months, once you have registered as self employed. On top if this, assuming your annual profit is over £5,595, you also have to pay Class 4 National Insurance Contributions as well, and this is based on your profits not your turnover. If your profits for the year are between £7,755 and £41,450 you will pay 8%, and 2% thereafter for any profit over the £43,875. Your Class 4 National Insurance Contributions are worked out along side your tax return and you pay them with your income tax. These National Insurance contributions go towards certain benefits such as maternity leave and state pension, however they don’t count towards additional state pension, statutory sick pay or job seekers allowance. Therefore it is advisable to make your own arrangements for your income protection insurance and a personal pension. 3. Can I claim the use of my home as a business expense? HMRC states that ‘. . . it is possible to apportion the use and cost of a room on a time basis, and to allow the expense of the room during the hours in which it is used exclusively for business purposes, in the same way as it is possible to calculate the business expenses of a car which is sometimes used for business purposes exclusively and sometimes used for pleasure.’
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Self Employed Guide
To running your own business Essentially this means that you can claim for electricity, heating and water and mortgage interest for the use of your home as an office space, based on the number of days a week you are working in the home office. You can also claim for council tax on the same basis, but you will need to be careful not to fall into a business rates charge, as your room is used solely as an office and not personal use. In all honesty, the ‘use of home’ allowance is a little complicated and changes yet again if you become a Limited company and continue to work from home, so we would always recommend that you speak with an accountant to get the most accurate and up to date information. You may find our page on self-employed expenses helpful. 4. How do I register as self employed? First and foremost you will need to register with HMRC, and this should be a top priority for any newly self employed person, as failure to register within three months will result in a fine. You need to do this even if you already fill in a Self Assessment Tax Return each year. 5. Can I offset travel expenses against tax? Yes. You can claim for business mileage, rail travel and any other business related travel costs that you incur. Business mileage is the travel you do for your job and can include travel to a temporary workplace or to meetings. It does not include normal travel between home, or anywhere that is not a workplace, and a permanent place of work, although this is unlikely to be an issue for you if you work from home. You will need to make sure you keep all your receipts in order to offset travel expenses against tax, as well as records of dates, mileage and journey details for all your business travel in your own car. 6. What are the advantages and disadvantages of going self employed? There are many advantages to being self employed, but also some disadvantages, so it’s always worth talking to an accountant or other business advisor about the pros and cons before making a decision. It’s also fair to say that working for yourself suits some people better than others, and an environment where you are not surrounded by colleagues in an office does not work for everyone. Some of the key advantages and disadvantages are as follows:
Advantages • You are your own boss - something which can be very satisfying. • You will naturally work in different roles and for many different companies - and this will help you to build a unique range of skills and experience. • You have the freedom to work when and where you choose, and for however long you like. • There is a direct link between work effort and reward, which sometimes doesn’t exist as an employee. • You have more flexibility over the payment terms that you can negotiate. • You can work for multiple clients at the same time, on many different projects, which can also increase your income. • Depending on your individual skills and on the state of the industry in which you work (or the market in general) you can command very high rates of pay.
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Self Employed Guide
To running your own business Disadvantages • You have to do everything yourself and you are responsible for the day to day running of your business. • You will rarely have the resources at your disposal that are available to an established business owner, and this may mean doing the tasks that you dislike. • Large salaries or income are rare in the early days, but you could be lucky! • If you choose not to work from home, or if you do not have the necessary space at home, you will need to pay rent and other overheads. • You may need to have a second job to help provide a guaranteed source of income for living costs in the early days, or even choose to start a business while you are still in full time employment, providing your employer is happy with this. • You need to offer a product or service for which there is demand, and this may depend on projecting a certain image, perfecting a technique or making a product unique. • Expanding too rapidly, or conversely not being quick enough to seize a chance, may be detrimental to your business. 7. How do I pay tax? Self Assessment involves completing an online or paper-based Tax Return, where you tell HMRC about your income and expenditure. There are deadlines for submitting this each year, plus penalties and interest charges if it arrives late. 8. When do I have to charge VAT? You will only need to register for VAT if you have reached the VAT threshold amount of £79,000 (as of April 2013) or if you expect it to reach this threshold in the next 30 days. Once over the threshold amount it is mandatory that you register for VAT and start charging interest to your goods and services from the day you have registered.
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Self Employed Guide
To running your own business 8. Limited Company FAQs 1. What is a Limited company? A private Limited company (LTD) is “an individual legal entity which is separate from that of its officers” (that’s technical speak for the people who run it!). A Limited company has its own assets and liabilities, profits and losses. The liabilities are limited to the company - in other words, the owners are protected from financial liability should the company encounter any difficulty. This is different from that of a sole trader, where the assets and liabilities of the business belong to the individuals. For example if you are a window cleaner operating as a sole trader, you’ll more than likely own your ladders, and the same goes if you were an IT freelancer - you will own the hardware. However if these two individuals traded through their own Limited companies, the company will own the ‘assets’ - i.e. the ladders and the hardware. Ownership of a Limited company is through issuing shares and, in small owner-managed businesses, the shares are usually owned entirely by the director(s). Limited companies must also submit annual accounts to Companies House each year which are made available to the general public. 2. What are the advantages of trading as a Limited company? a) Limited liability - Perhaps the most attractive benefit of trading as a Limited company is the aspect of limited liability. Essentially this means that your personal assets are protected, should the company run into financial difficulty. Operating as a Limited company is, for some, viewed as an ‘insurance policy’, especially for a new or high risk business, as it ensures that you do not risk your personal assets on what might be a speculative venture. b) Better tax planning opportunities - For example, every penny you earn in a tax year as a sole trader will be taxed that year, however with a Limited company you can store money in your company and take in future years. c) Simplified administration - Many of the costs and administrative requirements associated with running a Limited company are now not much more than those of a sole trader. Historically this wasn’t the case, but the government has made huge strides in helping small Limited companies to develop. d) Perception in your marketplace - Limited companies instil added confidence in suppliers and creditors. In fact, many large organisations will only conduct business with limited companies. People also have more confidence in your business as they can check up on your company, on the public records, at Companies House. Being a Limited company may also make it easier to attract people to invest money in your business, and could also make obtaining bank loans or mortgages that much easier. e) Ownership - The ownership of a limited company can be easily divided up through the sale of shares, and the sale of these shares can be used as a means of generating capital. You can also give a share of the business to others - e.g. a family member.
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To running your own business 3. Who can set up a limited company? Any individual of any nationality may register a Limited company, subject to a few conditions:
• They have not been restrained by court order • They are not subject to UK Government restrictions • They are not an un-discharged bankrupt However, if you live somewhere else but require a UK business bank account, you may find this difficult. 4. What kind of accounts and records must a limited company maintain? All companies are required by law to keep a full record of income, expenditure, assets and liabilities. These records must be kept safe as they will assist you and your accountant when submitting the company’s annual accounts. 5. When will I need to charge VAT? You will only need to register for VAT if you have reached the VAT threshold amount of £79,000 (as of April 2013) or if you expect it to reach this threshold in the next 30 days. Once over the threshold amount it is mandatory that you register for VAT and start charging interest to your goods and services from the day you have registered. As a Limited company there are various schemes that may work best for your business. For further information please look at our VAT Guide. 6. Do I have to submit any documents annually? Yes. You must provide a number of documents following your ‘Annual Reference Date’ (ARD). This date is usually the last day of the month your company was incorporated and occurs each year. It is the date that your financial year ends, where the accounts are not made up. You have nine months and one day from your ARD to return your abbreviated accounts to Companies House. You will need to submit your full accounts and a CT600 corporation tax return to HM Revenue and Customs within the same time frame, and you will also have to make a few other submissions to HMRC every so often. We would always advise that you engage the services of an accountant to help you understand what is required and when. 7. Do I need a company secretary? No. Since the 6th April 2008, it is the choice of the Limited company owner as to whether or not to have a company secretary. It is no longer a mandatory requirement, and most new single person companies don’t have one, as there is no work for them. 8. What information do I need to set up a Limited company? To set up a limited company you will need:
1. A company name 2. The company address (most people use where they live), a registered address (if different from company address) and the director’s basic details - such as title, name, date of birth and nationality 3. Total number of shares and shareholders - as a standard procedure we recommend that as a single person limited company you allocate yourself one share
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Self Employed Guide
To running your own business You can complete this process through our parent company SJD Accountancy. The formation costs £125 plus VAT and includes the following:
• Help with organising a company bank account - Easy Accountancy, along with most accountancy firms, recommends Cater Allen due to their history of good customer service and more importantly, their ongoing pledge to provide free business banking • Registering the company for VAT and PAYE - some companies charge as much as £100 for each of these services! • Professional advice throughout the process - including on the optimum share structure of the company For more information on our formation service please see: Form a Limited Company. 9. Do I have to trade immediately? No. Your company can remain dormant or ‘non trading’ for as long as you wish. However, you must file dormant account forms with both HMRC and Companies House, as well as an annual return form (Form AA02) with Companies House. Again we would advise that you ask an accountant for help with this. 10. What if the company doesn’t take off or I no longer need it? A Limited company that has not traded for at least three months can voluntarily apply to Companies House and HMRC for it to be removed from the register. This can be done by filing Form 652a.
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Self Employed Guide
To running your own business 9. Expenses Regardless of what type of self employed person you are, you will incur costs as a result of running your business. To help explain all of this, HMRC has produced a rather hefty yet comprehensive 100 page guide - although this is probably not quite the brief summary you were looking for! So hopefully the following will help as an alternative: a) Sole trader If you operate as a sole trader, life is quite simple. Basically your profits are your income less expenses, and you only get taxed on your profits - so the higher your expenses, the lower your tax bill. Remember though, you could be asked by HMRC to provide evidence that you actually incurred the expenses, and that the expense was wholly necessary for your business - so don’t even consider making them up, just so you can pay less tax! Any expenses that you offset against tax must be directly related to running the business, and HMRC defines these as being ‘wholly and exclusively for the purposes of your business’. However, as a self employed person, it is quite common to incur expenses that are partly business related and partly personal. In these cases, the business part of the expense can be claimed, but personal expenses cannot. For example, you may use your mobile phone for business as well as for personal calls and texts, in which case you can claim the minutes and texts that have been used for business purposes. One of the most common expenses for sole traders is a car. To calculate how much of the cost of running your car you can class as a business expense, simply add up your total yearly expenditure including fuel, repairs, insurance and so on. Then work out what percentage of the miles you do each year are for business, and apply that percentage to the total running cost. This is then the figure that you can claim as a business expense. There are separate rules for costs incurred through leasing or buying, and for ‘depreciating an asset’, as well as different rules for vans - so it’s probably best to have a chat with an accountant about this. The types of things you can claim for might include: • • • • • • • • • • • • • • • •
Accountancy fees Business travel and accommodation Company bank charges and interest Postage and stationery for business Business telephone calls Delivery charges Bank charges on business accounts Advertising and marketing Contributions to a pension Business entertainment Equipment purchased for business purposes Computer software Technical books and journals Relevant books and magazines Certain professional subscriptions Cost of goods bought for resale (stock)
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To running your own business • • • •
Motoring expenses Heating and lighting in your business premises (if you have these) Rent of your business premises (if you have these) Use of home as office
On the last point, following changes in HMRC regulations surrounding what can and cannot be claimed with regards to ‘use of home’, we would advise that you check with your accountant or with HMRC for the most up to date information. One other thing to note, you can’t claim for parking fines, speeding tickets and anything that isn’t related to running your business! To offset your expenses against your tax bill, simply keep the receipts and at the end of the year, add them all up, put this amount on your tax return as expenses and this amount will be removed from your income figure before your tax is calculated. In fact, if you enter all of your expenses into a spreadsheet as you go along, then you will have the figure to hand when you need it. And remember to keep all your receipts for six years - you won’t need to send them in, but HMRC could ask to see them at any time. b) Limited company For day to day expenses, you simply pay them yourself and claim them back through your company. To do this you’ll just need to do either a BACS transfer from your business bank account or write yourself a cheque from your company bank account cheque book. Please be aware the next section is very simplified and doesn’t include everything, but it will hopefully help you understand how expenses affect your tax bill, for a more detailed explanation it is best to talk to an accountant. Basically expenses aren’t taxed, so if your turnover was, for example, £10,000 a month and you didn’t have any expenses that month and you withdrew the full £10,000 from the business, then you would pay tax on £10,000 of income. However, if you had £2,000 of expenses in that month, you would only pay tax on £8,000. It doesn’t work exactly like this, as it doesn’t include the effect of your PAYE salary, dividends or even the Flat Rate VAT Scheme (if you’re on it) but hopefully it will give you a basic understanding of how expenses affect your tax bill. Running a car as a director of a Limited company is also different. Essentially, you can claim 45p per mile for the first 10,000 miles and 25p per mile thereafter. Which makes life very simple, but may not be as valuable to you as if you were a sole trader - especially with the cost of fuel these days! For further information on what expenses you can claim please see our guide to expenses or contact heather@easyaccountancy.co.uk.
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To running your own business 10. Admin Issues a) Setting up a business bank account If you do decide to set up a business bank account, then there are a number of factors to consider. Many freelancers will initially lean towards using their own bank, if that bank offers a business banking service. Although this may seem like the most convenient option, as your bank knows you and can easily validate your identity, it is important to look for an account which offers the best facilities. Whilst your existing bank may be great for personal banking, it may not necessarily be the best option for business banking. Some of the key things to consider when choosing a business bank account are as follows: • Charges and fees - Many banks offer great introductory rates, but after these expire fees can soon rack up, so it’s best to choose a bank that provides free business banking. • Telephone banking - Telephone banking is a hugely convenient service, so it’s worth looking at what different banks offer in terms of this. Again, it may also be worth asking fellow self employed people what facilities their banks offer. • Online banking - Making payments online saves the hassle of writing and posting cheques or having to use telephone banking, if you’re not a fan of chatting on the phone. Access to things like real time statements is also extremely useful, particularly when reconciling items for your quarterly VAT Return! But be sure to check if there are any hidden fees for using online banking. • Interest - Interest rates for business banking can vary widely between accounts, so it’s always best to do your research. • Referrals and testimonials - Which bank do other self employed people use? Unlike personal banking where you can easily ask just about anybody what their bank is like, it can be more difficult to find a bank with the right facilities for you. If you choose a bank which offers free business banking, you shouldn’t have to worry about every day banking fees. However, many banks do charge for things like debit card use, transferring money, issuing or paying in cheques and withdrawing cash. This can come as a bit of a shock if you’ve only used free personal banking before. Setting up an account is fairly straightforward and most banks will take around a week to get everything set up. All banks will have to carry out a series of security checks before opening a new business account. You may need to provide photo identification, such as your driving license or passport, as well as proof of your business address, which for most freelancers and self employed people is their home address. Easy Accountancy recommends Cater Allen. For further information please see our business banking page. b) Insurance Depending on what type of self employed person you are, you may or may not need to take out insurance, but it’s best to investigate thoroughly to ensure that you are making an informed decision. The two main types that self employed people may need are Professional Indemnity Insurance and Public Liability Insurance. Both insurances are expenses which can be offset against tax.
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To running your own business • Professional Indemnity Insurance - This meets the cost of defending claims and damages payable should a client suffer financial loss due to any negligent act, error or omission by you. For example, if you’re developing a software programme and you accidentally include a bug into the software which delays its delivery, it is highly likely your client will demand considerable compensation. Professional Indemnity Insurance will cover the cost of such a claim. Mistakes can be costly. The chance of a claim is small, but if it does happen, it may well be a large claim. Therefore, clients are increasingly asking to see proof of Professional Indemnity Insurance before engaging someone. Prices for Professional Indemnity Insurance start at around £165 a year so it is not a huge cost for the peace of mind - so is well worth considering. • Public Liability Insurance - This protects you against third party claims for injury or damage to people or their property. Despite your best intentions, accidents do happen and if the accident is as a result of something your business has done, then a client or a member of the public can claim against your business for compensation. Your ‘public liability’ can be triggered by something as simple as a designer spilling a drink over their client’s computer, or a personal trainer causing injury or damage. Prices for Public Liability Insurance start from around £115 a year, so again, this is not a huge cost to make sure that you are covered. • Life Insurance - Many people who choose to become self employed also decide that the best way of protecting them and their family is to take out life insurance which pays out a lump sum if you die. You might also want to consider health insurance, which pays you a weekly ‘wage’ if you are unable to work due to illness or accident. We recommend Hiscox, who can tailor your business insurance to suit your needs. To get a quote, call them on 0845 512 1895 or make an enquiry online at www.hiscox.co.uk/SJD. c) Pensions Having made the decision to be self employed, you are now your own boss - and nobody else is making any plans for your longer term future. So if you want a comfortable retirement, you will have to make your own plans, and for most people this means setting up their own pension scheme. If you are relatively young this might seem like something to worry about at a later date, but the sooner you set something up, the sooner that money will be growing into a fund that is large enough to support you in later years. Especially if you have an idea that you would like to retire early! This might seem like quite an expense to commit to in the early days of setting up your business, but the good news is that the government allows you to offset the cost of your pension contributions against your taxable liability. d) Mortgages Getting a mortgage as a self employed person doesn’t have to be difficult, but it is essential to choose a good broker, to avoid the hassles of dealing with lenders who are not familiar with the self employed world. An experienced broker can make use of the expertise and contacts they have built up over many years, making your life far easier.
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To running your own business Most self employed people have an employment history that can put many high street lenders off, and the ones who are willing to lend often apply expensive surcharges, so it’s important to work with a company that appreciates the difference between a freelancer and an employee. Our preferred business partner, Contractor Mortgages Made Easy, can ensure that you are making the most of the opportunities presented by your self employed status, and will help you avoid the pitfalls that you might face when working outside of a large company employee benefits package. You can contact the CMME mortgage team by emailing easy@contractormortgagesuk.com or by calling them on 0844 4488800. e) Accounting responsibilities for Limited companies As a Limited company you must keep ‘proper books and records’ for at least three years, or six years if your company is VAT registered. These records must be summarised in a compulsory format at your year end, known as your ‘statutory accounts’. These statutory accounts must show a ‘true and fair view’ of the company, and a copy must be sent to Companies House within nine months and one day of your year end. Companies House keeps details of every single Limited company in England, Wales and Northern Ireland, and there are a number of forms which you may have to fill in and send to them - so professional advice is essential. The most common forms you are likely to receive from either Companies House or HMRC are:
• Annual Return Reminder (363s) • Corporation Tax Return (CT600) It used to be compulsory for every Limited company to have its accounts audited. The rules have since been relaxed so in most cases, companies with annual sales of less than £6.5m are not forced to use an accountant at all. However, given that there are fines if you, as the director of your Limited company makes a mess of your accounts, it is probably unwise for you to adopt a DIY approach! In addition to this you should also keep track of your finances on a day to day basis. Accounting information is usually at least a year out of date and is, in any event, prepared for the completely different purpose of satisfying the tax authorities. So your own day to day records should always be maintained separately. f) The Data Protection Act If you use a computer to store information about any individuals, then you may be required to register under the Data Protection Act. Non-registration is a criminal offence for which fines plus costs may be imposed in the Magistrates Courts. Further details can be obtained from the Data Protection Registrar.
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To running your own business 11. Does IR35 Affect Sole Traders? The great news is: no it doesn’t! And if you are a Limited company with multiple clients for whom you carry out different projects, then it is extremely unlikely that you will be affected by IR35 either. Having said that, we thought it would be useful to include a section about IR35, so you are aware of any situations in which you might suddenly find it an issue. IR35 is legislation brought in by the Government in April 2000, to counter what HMRC class as ‘disguised employment’. An example of disguised employment would be if a permanent employee were to leave their company on a Friday afternoon then return to work on the Monday, at the same company, doing the same job role, but self employed rather than as a permanent employee. The aim of the IR35 legislation is to stop people leaving full time employment and then returning to the same job immediately as a self employed person working through their own Limited company, in order to reduce their tax liability and their NI payments. For self employed people who operate through a Limited company - if you did find yourself working for a single client, in a role which has the same level of risk, responsibility, liability and control as a permanent employee, then you could be classed as being ‘inside IR35’. This means you would have to pay full tax and National Insurance contributions (instead of the usual salary and dividends from the profits of your company) and have reduced expenses allowance. This is because HMRC believes that, as you aren’t taking the financial risks, nor have the same level of control as a director of your own Limited company, you are not entitled to the same corporate tax structure. If you are unsure a specific client arrangement falls inside or outside of IR35, Easy Accountancy offers a free verbal IR35 review. Alternatively, if you would like a written review, this is also possible and costs £150 plus VAT. For more information on our IR35 contract review service please email heather@easyaccountancy.co.uk.
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To running your own business 12. VAT Some people wrongly believe that if you operate as a Limited company rather than as a sole trader, then you have to register for VAT, but this is not the case. Regardless of how you operate, you do not need to register unless you hit the VAT threshold, which is currently £79,000 for the financial year commencing April 2013. However, many people choose to register for VAT even if they are below the threshold - find out the reasons why later in this section. Whether you are a sole trader or a Limited company, the reasons to register for VAT are the same, and the processes are also similar. Registration for VAT is compulsory when the annual turnover of your business, calculated to the end of any month, reaches the mandatory threshold – and this goes up slightly each year. Once you are registered, you have to charge VAT on all of your invoices to UK companies - and at the moment, for FY2013/14, that rate is 20%. You can also claim back the VAT on any business purchases that you make. a) When to register If you expect that your turnover will exceed the threshold limit in the next 30 days, you must register your company for VAT - and if you fail to register at the appropriate time, you will be liable to a penalty. You should keep a copy of your registration notification, as postal delays could affect the date on which HMRC receives it – and a penalty can be mitigated or cancelled in total if there are genuine circumstances which prevented you from submitting your application on time. b) How to register and start charging All the required VAT registration forms are available on the HMRC website. VAT registration usually takes about six weeks, but this does not prevent you from invoicing your end clients with VAT included, or reclaiming VAT on expenses, during that time. You can start charging on the day you register for VAT, not the day you receive your certificate. Whilst waiting for your VAT certificate, you will need to raise your invoices as a total figure, which includes the sale amount and the VAT amount. For example, if you are invoicing £1,000 worth of work, then the invoice should be for a total figure of £1,200. Then, once you have received confirmation of your VAT number you can add this to your invoice, separate the sale and VAT amounts (£1,000 and £200 using the example above) and re-issue it to your client who will then be able to reclaim the VAT which you have charged. c) Advantages of registering below the threshold Many people choose to register for VAT even though they do not have a turnover of £79,000, or whatever the current threshold was when they registered. This is primarily because it gives their business more ‘kudos’ with customers, or simply because it makes the business appear larger and more well-established than it really is. If you do choose to register for VAT, then there is also the advantage of being able to claim the VAT back on everything you purchase for the business, but the ultimate benefit of this will depend on the type of company you have. If you buy things in and sell them on as part of your business function then it will be more of an advantage than if you only sell your time as a ‘service’, for example in the case of a copywriter or software developer. If you are planning to reclaim the VAT you have paid when buying goods or services for your company, remember to ask for a VAT receipt, which shows the supplier’s VAT number, as they will not automatically be provided every time and you will need this to reclaim the VAT.
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To running your own business If you want to register despite not reaching the threshold, you will need to satisfy HMRC that you are running a business, or intending to run a business, and that you are making what is known as ‘taxable supplies’ – e.g. selling products or services for which VAT could be applied. You will have to provide satisfactory evidence and we suggest sending a covering letter as well, to pre-empt any questions that HMRC might ask. This is especially useful if you are a sole trader, and cannot demonstrate the existence of your business in the same way as someone who holds a Limited company Certificate of Incorporation can. d) Claiming VAT back Once your business is VAT registered, you will be able to claim back any VAT incurred on business expenses. Expenses on which you can usually claim VAT include: • • • • • • •
Computer equipment and software Stationery Accountancy fees Legal fees Telephone calls Fuel and motor repairs 50% of the VAT paid on either car lease rental payments or car contract hire payments
Expenses on which you cannot usually claim VAT include: • • • • • • •
Postage Technical books and journals Public transport costs The purchase of a car Road tax and insurance Payments to the Registrar of Companies (if Limited) Payments of directors’ remuneration (if Limited)
e) Submitting a VAT Return Every quarter, you must submit a VAT Return to HMRC, or you can ask your accountant to do this for you if you have one. As of 1st April 2010, all businesses with a turnover of £100,000 or more have to file their VAT Returns online, regardless of whether you are operating as a Limited company or a sole trader. The return must show all your ‘output’ tax – e.g. the total VAT you have charged your clients on products and services which you have provided. It must also include the VAT you wish to claim back against charges you have incurred on purchases for your business as outlined above. This is known as ‘input’ tax. To set yourself up for submitting VAT Returns online will need to visit https://online.hmrc.gov.uk/registration/ organisation?httpmethod=post. Tick the option ‘VAT (submit return or change details)’ two thirds of the way down the right hand column, and then follow the instructions. Please note, this can take up to seven days to set up, as HMRC have to send you a Government Gateway activation PIN and User ID - therefore it is best to do this as soon as possible after receiving your VAT certificate. However, there will be an option to submit your first return following registration, without the need to wait for the PIN code through the post. For additional guidance on how to sign up to use VAT online services, visit http://www.hmrc.gov.uk/vat/start/ register/signup-online.htm
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To running your own business 13. The Flat Rate VAT Scheme Many freelancers and self employed people provide a ‘service’ rather than selling products. In effect you are selling your time rather than a physical item, and as such you probably don’t have to buy many things which would be classed as a business expense - and certainly not on a regular basis anyway. In these situations, the Flat Rate Scheme (FRS) is ideal. It is an incentive provided by the government to help simplify VAT for small businesses, especially those who provide a service and therefore do not have large amounts of VAT to reclaim for business purchases. a) How it works With this scheme, you charge VAT on your invoices at 20% (FY 2013/14), but pay back HMRC at a lower rate. This rate differs depending on your profession or trade, and changes every time VAT rates change, so be sure to check this each year. Also, in your first year using the Flat Rate Scheme, you will receive an extra 1% discount. This difference in the rate you charge and the rate you pay is additional income for you. The Flat Rate VAT scheme still requires you to complete a quarterly VAT Return form, but when you complete this, you simply calculate your VAT payable on the amount you have invoiced that quarter. b) Financial examples The example below is based on a freelance marketing business that pays VAT at 10%, which includes the first year discount:
• • • • • •
Net amount you invoice your client VAT charged on top to your client (20%) Gross amount VAT to be paid to HMRC VAT received from client Profit for you - i.e. what you get to keep
£5,000 £1,000 £6,000 10% of £6,000 = £600 £1,000 £400
This example is probably at the most beneficial end of the scale, as marketing and advertising freelancers normally pay 11% after the first year - whereas an IT freelancer for example may have to pay 14.5% - but it shows how much could be saved on the flat rate scheme. Using the example of the IT freelancer above, who pays 13.5% of the gross amount in the first year and then 14.5% in subsequent years - they would receive the following, based on a 45 week working year:
• Average earnings of £200 a day - £1,710 per year • Average earnings of £350 a day - £2,990 per year • Average earnings of £600 a day - £5,130 per year Two key points to note however are that a) your payment is calculated on the gross amount (invoice figure plus 20% VAT) and not just the invoice figure, and that b) any profit you make through the flat rate scheme is also taxable and must be declared as income. So, whilst it definitely saves you money, it’s not quite as much as it might first look in terms of hard cash!
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To running your own business c) Advantages
• The ability to earn money from VAT. You can earn thousands of pounds extra each year simply out of VAT because you are in effect acting as a tax collector for HMRC! • A reduced amount of paperwork to handle. As you are not submitting any of your input costs to HMRC, all you need to do is keep the receipts from your purchases. • If you are a new business that is using the Flat Rate Scheme in your first year, you receive a further 1% decrease on the overall percentage VAT you pay each quarter. d) Disadvantages
• Companies on the Flat Rate Scheme are unable to claim back any VAT on purchased goods and expenses for their business. We recommend discussing all your VAT scheme options with an accountant before deciding, as there are a number of variables which might affect your decision. For example, if you are on the Flat Rate Scheme you can still reclaim VAT on capital asset purchases over £2,000, which is good - but they must all be on the same receipt. You cannot for example, purchase a PC one month for £1,500, then a printer the next month for £300, and a scanner the month after for £200 and then add them together. So it is all these types of oddities which make it a good idea to work with an accountant! e) When not to join the Flat Rate VAT Scheme If you estimate that your annual turnover, excluding VAT, will exceed £150,000 in your first year, you should not join the scheme – and if your annual turnover exceeds £230,000 including VAT (FY 2013/2014) in subsequent years, you will have to come off the scheme. For further advice on if you should join the Flat Rate VAT Scheme, please call us on 0500 234111 or email heather@easyaccountancy.co.uk.
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To running your own business 14. Tax How can such a short word cause so much confusion and strike fear into the hearts of so many? Sadly there’s no getting away from it - tax can be complicated! However, this shouldn’t stop you from setting up your own business, whether as a sole trader or a Limited company. a) Sole Trader As a sole trader, your tax situation is actually very similar to what it would be as an employee. You simply pay tax on your income in exactly the same way as you always have done. The key differences though, as a self employed person, are that you have to submit your own Self Assessment Tax Return and you have to keep records so you know exactly what your ‘income’ is - based on your invoice figures less your allowable expenses. You will have a personal tax allowance of £9,440 (FY 2013/2014) on which no tax is paid - and you will then pay 20% tax on all income up to £32,010, then 40% for anything over £32,011 up to £150,000, then 45% on anything over that. From the 2013/14 financial year, the 45% tax bracket will not apply. This is based on income received within each financial year – which runs from 6th April to 5th April of the following year. Personal tax is payable annually on 31st January, with potential additional ‘payments on account’ in January and July. It is also worth mentioning that once you earn over £100,000, your personal allowance will be reduced at a rate of £1 for every £2 of income until it is reduced to zero, so by the time you hit £114,950 your personal allowance will have disappeared, this effectively means that the £14,950 after £100k will have been taxed at 60%. b) Sole Trader Tax FAQs i) Why do I need to fill out a Tax Return? This enables you to tell HMRC about your various types of income, business expenditure and any other ‘capital gains’ (profits on your business assets) so that they can accurately work out your tax bill. It also helps HMRC to work out whether they owe you any tax which you may have previously overpaid. ii) How do I know if I need to fill out a Tax Return? If you’re self employed, whether full time or part time (and so do not get paid through an employer, get a payslip or pay income tax on your earnings) then you will definitely have to fill out a Tax Return. If you’re already registered as a sole trader then HMRC will send you a notification that you are required to complete a Tax Return. If you haven’t yet registered as a sole trader but you know you need to fill out a Tax Return, make sure you register as self employed as soon as possible, as failure to do so can result in a penalty. iii) Will I be sent a form automatically or do I have to request one? Self Assessment Tax Return forms are issued after the end of the tax year, which is 5th April, and cover the previous 12 months. You will receive one as standard if you have registered as self employed, which you should have done when you set up the business. If you do not receive one for any reason, then don’t think you’ve ‘got away with it’ and don’t have to complete one. HMRC will catch up with you eventually, so you might just as well ask them to send you one. It’s your responsibility to do so. iv) How do I submit my Tax Return? There are two options in terms of how to fill out your Tax Return - either a paper-based return or an online return. There are a number of advantages to completing your Tax Return online, including the fact that the deadline is three months later each year!
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To running your own business However, be aware that this can take up to seven days to set up initially, as HMRC have to send you a Government Gateway activation PIN and User ID - therefore it is best to do this as soon as possible, well in advance of when you need to send your first Tax Return. This is the same government portal that you would use for submitting VAT Returns online, and as these have to be done quarterly, you may already have one in place by the time your Tax Return is due. When you register online, you must ensure that you have a unique tax reference (UTR) number, which is a ten digit number that should be included on any correspondence from HMRC. v) What information do I need? Most people generally find filling out a Tax Return confusing, and rightly so. HMRC’s guide to expenses alone is over 100 pages long! So whilst you can fill out a Tax Return yourself, if you’re not a qualified accountant it can be a minefield - leaving you with potentially expensive penalties and an incorrect amount of tax to pay. As such, we recommend that it’s always best to speak to an accountant about the information needed to complete a Tax Return. However, the basic information you need is:
1. The amount invoiced over the tax year - your income 2. Bank interest received 3. Any employment income earned during the year if relevant - a copy of your P60 or P45 should have the information required 4. Property income and allowable expenses - rent and expenses from any owned property 5. Expenses incurred during the year 6. Any tax that has already been deducted from your income - most commonly pension, bank interest and employment income 7. Any national insurance paid Throughout the tax year, make sure you keep all books and records in a safe place, as HMRC can request to view your records at any time. Of course, it can be a bit time consuming to collate all of your income details and receipts - but if you’ve kept everything in good order from day one as we recommend, you will have less to worry about when it comes to filling out your Tax Return. If you’ve pushed all your records to the back of a dusty drawer, don’t worry. Start collating them together as soon as you can, and then get in contact with an accountant who can help you manage your finances! We would always recommend keeping a spreadsheet which lists all of the work you have invoiced in the tax year, and all business expenses which went out. The aim is to end up with a profit figure based on your income less your expenditure, and your tax liability will be calculated on this figure. As a self employed person, by law you must keep your records for five years and ten months after the end of the tax year that the figures relate to. In fact if you don’t keep the records that you need to file a Tax Return, you can be fined up to £3,000. vi) What happens if I make a mistake or send incorrect information? If any of your personal details have changed, or if you find that you (or the Tax Office!) has made a mistake, then you must let HMRC know as soon as possible. You can be penalised if your Tax Return is incorrect through fraud or negligence – for example of you provide incorrect figures on purpose, then you could end up with a criminal conviction if you try to ‘cheat’ the tax system. All in all it’s best to get it right first time if you possibly can.
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To running your own business vii) When do I need to complete my Tax Return? A paper-based return must be submitted by 31st October each year, and an online return must be completed by 31st January of the following year. You will be sent a reminder in December stating that you need to fill out a Tax Return, and if you have an accountant, make sure you get in touch with them in advance of the deadline. If you miss the 31st January deadline, you will incur a £100 fine and may be charged additional interest on late payments - and if you fail to complete your return by 28th February, you will also have to pay a 5% surcharge, based on the value of tax you owe. You will save yourself a huge amount of stress if you do it sooner rather than later. There’s nothing to be gained by leaving it until the last minute, and it certainly won’t delay the date on which you have to actually pay the tax! This not only causes more headaches as the deadline approaches, but it also leaves you in a situation where there will also be no time to correct mistakes, or to ask for help if you have any problems. Which is why we would always encourage you to complete your Tax Return as soon after April 5th as possible. Although you can complete your Tax Return yourself, this can be a long process - and if you’re not a qualified accountant, you can never be sure that you’re entering the correct figures. If you do enter incorrect figures you may be liable for interest on the underpaid tax, and other costly penalties. As such, we’d always recommend hiring an accountant to fill out your Tax Return, to make sure you never have to pay expensive penalties. You just need to provide the correct income and expenditure information and they will do the rest! viii) Is there any way to avoid the penalties if I send my Tax Return in late? You have to have what is considered to be a ‘reasonable excuse’ for missing the deadline. There are no fixed rules on this, but usually any delay must be due to an exceptional or major unexpected event that’s completely outside your control. Some examples of what HMRC may consider as a ‘reasonable excuse’ include:
• Documents being lost through theft, fire or flood leaving you unable to replace them in time • Life-threatening illness, for example a heart attack or an extended hospital stay which prevents you dealing with your tax affairs on time • The death of a partner shortly before the filing date – where possible, you may need to demonstrate that you had taken steps to prepare the return on time before this happened • Problems with the online filing service, where no alternative option was available – for this, you’ll need to provide copies of any error messages you received, so take screen grabs wherever possible If you have a ‘reasonable excuse’ then you can ask for the penalty to be reconsidered, and HMRC will look in detail at the information you provide, and any other evidence that is available. But don’t wait until you receive the penalty notice, instead make any claim as soon as you possibly can. To do this, write to your local Tax Office and give the following details:
• Your name and Unique Taxpayer Reference (UTR) - you’ll find this on documents such as your tax return or Self Assessment Statement • The date you sent your return • The reason why the return was late
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To running your own business ix) What personal information do I have to include in my Tax Return? Although you are now operating as a business, and your income is based on the profits of that business, you are in effect completing a ‘personal’ tax return. So you’ll also need to make sure that you keep details of all other aspects of your income, if relevant. For example, if you set up the business halfway through a tax year, you’ll need details of your salary and your tax payments from when you were employed. This should all be contained in the P11D and P45 which you should have received from your employer when you left. Other personal income could include interest on savings, income from property rental or a part-time job, or any other income sources you might have – maybe, for example, if you were working on a more casual basis in the evenings before you set up the business? x) When do I pay tax for the year 12/13? If you started your business in the year 12/13 this will be your first Tax Return. The amount you pay will of course be dependent on the amount you invoiced over the year, but as an example, we’ll say that the tax owed is £3,000. January 31st 2014 £3,000 - tax bill £1,500 - this covers half of your projected tax bill for 13/14 = £4,500 to pay July 31st 2014 £1,500 to pay January 31st 2015 £4,000 - your tax bill may increase in the second year £3,000 already paid £1,000 to pay For new sole traders and freelancers, you’ll have to take into account the additional tax paid for the year 13/14 which will be paid on January 31st 2014. c) Limited Company If you are operating through your own Limited Company, then the tax situation is quite different. When thinking about Limited company tax, the best option is to think of the company as one entity and yourself, an employee and owner of the company, as a separate entity. This may seem strange but it will make tax far easier to understand. d) Limited company tax FAQs i) What is Corporation Tax? Corporation tax is the tax that you pay on your company profits, which are simply defined as ‘net sales less net expenses’. All Limited companies have to pay Corporation Tax and the current rate for companies with profits under £300,000 is 20% (FY 2013/2014). So for example, if you invoice your clients £100,000 excluding VAT over the year, and have expenses of £20,000, you will pay 20% on the remaining £80,000 profit. Your company’s corporation tax is due nine months and one day after the company’s financial year end.
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To running your own business ii) What are Employer’s and Employee’s National Insurance Contributions? For employer’s NICs, your company will have to pay NI at 13.8% (FY 2013/2014) on any salary you pay yourself, over the required threshold amount. And for employee’s NICs you will need to pay NI on any salary you pay yourself from the business, which is 12% on anything earned above £149.01 per week - until you reach £797 per week, and then you’ll pay just 2%. PAYE Income tax/NI is, along with VAT, payable quarterly - but your accountant will be able to advise you of these crucial dates. There is no NI payable on dividends. iii) How does PAYE work? For Limited company owners, Pay as you Earn (PAYE) can be a bit of a minefield. If you’re a sole trader you don’t need to worry about PAYE – all your tax is sorted out in your tax return at the end of the tax year, but if you have a Limited company you will need to sort out your PAYE through the company. PAYE is the method of paying income tax and National Insurance (NI) to the government. Every employee in the UK has to pay tax out of their wages, and the amount of PAYE paid to the government out of a person’s wages will depend on how much they earn. If you own your own Limited company then you are an employee of that company even though you are the owner and probably the only director - so your PAYE will be deducted from the salary you pay yourself, although not from any dividends. The PAYE that is deducted from your salary before you receive it is kept within your business bank account until it’s declared and paid to HMRC. If you are thinking of setting up as self employed through a Limited company, and need to know more about PAYE, we strongly advise that you speak to an accountant. iv) What personal income tax do I have to pay? Any income taken as a salary from the business is taxed in the same way as you would be if you were an employee of a company, using the same tax thresholds as outlined in the sole trader tax section. As director of your own Limited company, you will need to register for Self Assessment in the same way as someone who is operating as a sole trader. v) What are Dividends? These are an additional, and alternative, way of paying yourself from the profits available in the company. Dividends are a portion of the company’s earnings that are returned to shareholders - i.e. you as the owner - and this is profit that you receive after tax. Any salary you draw from the company attracts both employer’s and employee’s National Insurance, whereas the remaining profits, if taken as a dividend, do not attract National Insurance. Dividends can be paid at anytime providing there are available profits. It’s entirely up to you when and how much you pay, as they are your profits after all. Paying tax on Dividends is a little complex due to issues around allowances, dividend tax credits and the fact that company profits have already been taxed - but as a rough guide, once you have exceeded the combined total of your personal allowance and basic rate tax band, the overall rates are similar to the personal higher tax bracket of 40%. For more information on Dividends we would recommend speaking to an accountant.
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To running your own business vi) What happens if I don’t pay my taxes? Should your company default on the payment of PAYE and NI, and claim that limited liability will exclude payment, directors should be aware that there are existing procedures – which have been used successfully in the past - to enforce PAYE liabilities on the employee who received the emoluments and, in the case of NI, any director of a company which fails to pay NI due, where the director is fraudulently or negligently concerned with non payment. It is also possible to obtain freezing orders over a director’s personal assets to secure payment of NI liabilities. e) Important Dates It’s worth remembering that both HMRC and Companies House levy fines and interest for late filing of returns and late payment of taxes! There are various dates which you must be aware of, both for company related tax issues and for your own personal tax issues - and these are as follows: Company Corporation tax payable
Company’s Annual Return
Date due Within 9 months and 1 day of the company’s financial year end Filed within 9 months after the company’s financial year end Anniversary of incorporation date
Personal Personal tax year end PAYE and National Insurance on salary Self Assessment return
Date due 5th Apr 19th Apr Due by 31st Oct if hard copy or 31st Jan if online
Annual Accounts
Tax is complicated and sometimes it may be easier to speak an expert. For further advice on tax call us on 0500 234111 or email heather@easyaccountancy.co.uk.
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To running your own business 15. Accounts Made Easy You may wish to download our free bookkeeping software. Understanding accountancy and finance is like driving a car. It fills most people with dread, but once they’ve had a bit of experience it becomes second nature and they wonder what all the fuss was about! Accountancy is all about ‘identifying, recording, analysing and explaining the financial implications of business transactions and decisions...’ quite simply, it allows you to understand how your business is performing and if you are meeting your objectives. Whether you are operating as a sole trader or a Limited company, it is important to manage your accounts efficiently. Whilst it is undoubtedly simpler if you are a sole trader, many of the accounting procedures which you have to carry out by law as a Limited company are also very good to get into the habit of doing - even if you are not required by law to do so. The first thing to realise is that many people will be interested in your accounts - for example:
• Clients may want to look at your accounts to decide whether you are a successful and reliable business. If you are a sole trader, then a client could simply ask to see them, and if you are a Limited company, then your accounts will be available online as a matter of public record. • HMRC needs to see your accounts to work out how much tax you owe. • Suppliers may ask look at your accounts to decide whether you are a worthwhile credit risk. • Bank managers will want to see your accounts to help them to decide whether to lend you money, should you need this facility in the future. • Mortgage providers will need to see your accounts before they give you a mortgage. a) Who are accountants? Unfortunately, there is nothing to stop anybody calling themselves an accountant. This means that it is vitally important to understand the difference between qualified accountants and tax advisors, and those who are unqualified.
• Bookkeepers – their role is largely to ‘keep the score’ by recording the financial effects of what a company has done. They are usually the best people to do routine accounting work. • Qualified accountants and tax advisers – these are experienced professionals who have undergone rigorous training and passed extremely difficult exams. There are a number of leading qualifications - but if you look for the letters ATII, ATT, ACA, FCA, ACMA, FCMA, ACCA, CA or FCCA after the accountant’s or tax adviser’s name, you should not go too far wrong. Qualified advisers are best at dealing with the non-routine aspects of your business e.g. helping you to increase your profits, produce your statutory accounts and pay less tax. • Unqualified tax advisers and accountants – before deciding to use the services of one, we suggest you ask yourself – ‘would I put the health of my family in the hands of an unqualified doctor?’ If the answer is no, as we’re sure it would be, why consider putting the health of your business in the hands of an unqualified tax adviser or accountant? Don’t be afraid to ask what qualifications and expertise they have - and if you have any doubts, try somebody else.
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To running your own business b) Types of accounts There are two main types of accounts - Management Accounts and Statutory Accounts, also known as Financial Accounts.
• Management Accounts - these accounts are essential for well-run businesses, but are not strictly required by law. As their name suggests, Management Accounts are mainly used by management. In fact it is very rare for them to be shown to anybody outside the business, and you cannot usually be forced to show them to anyone other than the auditors. There are no rules that say what Management Accounts must look like - it is up to each business owner to decide what format will best help them to understand what’s going on, control the business and make better decisions. Management Accounts often predict the future as well as keep track of the past - i.e. they usually include forecasts of what is going to happen tomorrow, as well as recording what happened yesterday. In contrast, Statutory Accounts only ever record what has already happened in the past. • Statutory Accounts - these are compulsory for Limited companies, and must be sent every year to the shareholders in your company, if you have any, and to Companies House. In addition they must follow a standard set of rules and conventions, and show what went on during the financial year. These accounts are mainly used by people outside your business e.g. bankers, clients, suppliers and of course, HMRC. Both sets of accounts use the same basic information which they get from the same place – your company ‘books’. c) Simplifying the terminology We said before that business finance and accountancy are a bit like driving a car. Good drivers use the dashboard to monitor their progress - and in just the same way good managers use their accounts to monitor the progress of their business. So, accounts are, in a sense, your ‘business dashboard’. The two key instruments on your car’s dashboard are probably the speedometer and milometer. These are quivalent to the two key elements in any set of accounts - the Profit and Loss Account and the Balance Sheet. These are more likely to be relevant for Limited companies.
• Profit and Loss Account - in a car, the speedometer shows you how fast you are going. This is equivalent to the Profit and Loss Account, which shows how fast your business is accumulating profits. Both the speedometer and the Profit and Loss Account only make sense when viewed over a period of time. The speedometer shows ‘miles per hour’, while the profit and loss account shows ‘profits per year’. • Balance Sheet - the balance sheet is like the milometer. A milometer records how far the car has travelled and is often used as an important factor in deciding how much a car is worth. In the same way, your balance sheet measures how far your business has travelled. It is a snapshot of where the business has got to and gives some indication of how much it might be worth - but like the milometer, it tells us little or nothing about how, or how quickly, it has got to where it is.
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To running your own business d) Basic principles of accounting Most accounting is little more than applied common sense. However, there are two golden accounting rules that are not immediately obvious - and so it is worth spending two minutes describing them.
• The accruals principle - your accounts should reflect things when they arise or are earned - which is not necessarily the same as when you actually pay or are paid for them. For example, an April sales invoice should be included in your April accounts, even if your client doesn’t pay you until August. • Revenue v capital payments - some of the things you spend money on will not be regarded as reducing your profits. For example, the money you pay to buy a new car or pay off a loan. Accounting conventions say that payments like these shouldn’t appear in the Profit and Loss Account - instead their effect is confined to the Balance Sheet. The key distinction here is between ‘revenue payments’ and ‘capital expenditure payments’. Revenue payments are the running costs of the business - the type of expenses that buy goods and services which are used up quickly - e.g. wages, advertising, rent, stationery and so on. This type of expenditure is shown in the Profit and Loss Account and is often referred to as having been ‘expensed’. Capital payments relate to things that continue to benefit the company for several years - e.g. computers, cars and so on. They also include paying off loans. This type of expenditure is shown in the Balance Sheet, and is often referred to as having been ‘capitalised’. e) Your accounts We have now explained the building blocks of every set of accounts. The following examples are stylised versions of what these building blocks are used to construct - your Profit and Loss Account and your Balance Sheet. Again these are only really relevant for self employed people who are operating as a Limited company. Your Profit and Loss Account
Figures for Sales Less ( - ) Costs Equals ( = ) Profit
Description Made by your business - even if not yet paid for Revenue expenditure costs of goods and services used to generate, supply and support those sales - even if not yet paid for How much your business has really made
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To running your own business Your Balance Sheet Balance sheets are always presented in two halves. The top half shows the company’s net assets and the bottom half shows where these net assets have come from:
Figures for Share Capital Plus ( + ) Profits Equals ( = ) Net Assets
Description What your company OWNS
Figures for Assets Less ( - ) Liabilities Equals ( = ) Net Assets
Description What your company OWNS
How much profit you have earned but not spent since the business started This will be the same figure as in the top half of your balance sheet - i.e. roughly how much your business is ‘worth’
What your company OWES Rough measure of how much your company is ‘worth’.
f) Bookkeeping basics Your accounts can only ever be as accurate as the books you keep. In this section we explain the books you will need - and those you won’t.
• Cash book - this is your single most important ‘book’ as it will record all of the payments made into and out of your business bank account, if you have one. It is crucial to set up the book appropriately at the commencement of business - and even if you don’t have a business account, it will help you to keep track of your business incomings and outgoings. • Sales invoice file - it is both very helpful to your business, and reassuring to HMRC, if you issue your sales invoices in strict numerical order. You should set up a file for each month and file your sales invoices in strict numerical order, either physically or electronically. The only exception to this rule is that unpaid invoices should be kept in a special section of the file until they have been settled, at which point you should mark them as ‘paid’ and also indicate the date paid, then file it in strict numerical order. Download our free invoice template. • Purchase invoice file - you should set up a file for each month with a separate section for unpaid bills. This can either be a physical file, if most of your bills are received by post, or an electronic one of most of your bills are received by email. In fact, many self employed people who operate a service-based business rarely receive bills - but it is good to have a process in place for those that are received. On receiving an invoice, file it in the unpaid section until such time as you pay it. On paying the invoice you should make a note that it has been paid and on what date, and then transfer it from the unpaid section of the file to the section for the month in which you made the payment. You should also, of course, ensure that the payment is recorded in your cash book.
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To running your own business 16. Managing Your Money To make your business a success, regardless of how you operate, there are two key things which you must always do. Firstly, make sure you get paid, and on time - and secondly, ensure that you make the best possible decisions when buying items. In business terms, we’re talking about ‘credit control’ and ‘purchasing’. This section outlines how to manage these two key business areas effectively, as well as giving advice on managing your budget and making sure you don’t give too much away as discounts - as well as telling you how to take advantage of some free resources. a) Credit control This sounds very scary and formal, but it’s really just good business sense, and you should have a procedure in place even if you are operating as a sole trader. There are a great number of undesirable potential clients in the market, who can inadvertently or deliberately cost your business a great deal of time and money by not paying their debts. There is only one thing worse than having no work - and that’s having lots of work, but not getting paid for it. In most businesses it is normal practice to make detailed credit enquiries into any new client that is requiring credit terms. However this is not always ‘politically correct’ for self employed people - as it might even damage a new relationship if they feel you do not trust them, especially as they will probably be a far larger organisation that you are! We therefore usually suggest a low-key approach to be the most appropriate. In particular, we recommend that you contact a specialist credit reference agency such as Dun and Bradstreet in order to obtain a detailed (and private and confidential) credit reference on every new company that you would like to do business with. This reference should then ideally be discussed with your accountant, if you have one, before you make a decision to work for them. Here are some key points to bear in mind:
• In the credit vetting process, you cannot afford to rely solely on the apparent size (or claims as to its size!) of an organisation, or on the qualifications of its representatives. Even the largest companies don’t always pay their debts, and these qualifications are not always what they seem. • Credit vetting is not a one-off exercise, it should be continuously monitored and re-evaluated, taking account of both the client’s payment history with your own business and by regularly updating the externally available information such as that provided by Dun and Bradstreet. • Be aware that recovering unpaid debts from clients based in Scotland is considerably more difficult given the peculiarities of the Scottish legal system. Once you have decided to extend credit terms to a Scotlandbased a client, set them a credit limit and notify them of both the limit, and the general terms of trade upon which you are prepared to do business with them. Also, ensure that these terms are stated in your contract and on your invoices. • Withhold further credit from any client who has exceeded their limit or whose account is significantly overdue. Alternatively, make an arrangement to supply them with, say, £500 of extra work for every £1,000 that they pay off their account. Always ensure that the details on your invoices are accurate, since mistakes will not only damage your credibility, but will frequently be used by the client as an excuse for delaying payment.
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To running your own business • Send invoices as soon as possible. Not only is this necessary to establish the correct date for VAT purposes, but it also starts the credit period clock ticking. Ensure that your records enable you to see the age of all outstanding debts, so that these can be accurately identified and monitored, and all risky debts can be identified and acted upon at the earliest opportunity. • Try not to offer settlement discounts. They rarely encourage prompt payment, but once established they are frequently claimed and deducted from remittances, even by slow payers. They are also unlikely to be very important in influencing a professional buyer in his decision whether to use your services. • Offer discounts for ‘cash in advance’. Not only does this help you to get paid quickly, but it is often attractive to the buyer, because the discounts actually appear on your invoice, and the buyer will be able to take the credit for negotiating them. • Get to know the person who writes the cheques and become their ‘friend’. Chase overdue debts at regular intervals, keeping a log of all ‘explanations’ for non payment. Initially, use the telephone to request payment, and after the second phone reminder put your request in writing, progressively sharpening the tone and content of the requests. • It is often helpful to bring the problem of the unpaid debt to the attention of the actual user of your services, and quietly suggest to them that you cannot guarantee future service until the account is settled. Your main contact may not even be aware that their accounts department has not paid you. • Be systematic and ruthless over debt collection. It can often require as much effort as winning the original contract! However, without the extra effort the contract is actually worthless, since it has cost you money but has earned you nothing. Ultimately, if your client persistently fails to pay, it may be appropriate to make a claim through the small claims court - a relatively simple and inexpensive process that frequently earns the desired result. In fact, merely threatening this action, or making references in your email to ‘taking advice from your debt recovery solicitor’ can often have the desired effect! b) Purchasing To get the very most out of every pound you spend, there are a number of different things that you should do:
• Select your proposed purchases after careful research - it can be very expensive to buy the wrong thing. • Make full use of independent brokers and advisers if they are available on a no fee basis - as in the case of insurance brokers and independent financial advisers. • In the case of purchasing general equipment, consult publications such as Which? and What PC?, as well as looking online for reviews on reputable websites such as Amazon. • Select a supplier for your chosen purchase based on a pre-prepared list of criteria such as price, availability, location, delivery time, credit terms, training, after-sales support and guarantees.
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To running your own business i) Negotiation techniques If one supplier is ahead of the field in all areas other than price, then point out their price disadvantage and ask them to reconsider, since you would very much like to buy from them today if only they were a little less expensive. This simple tactic has stood the test of time as a method of worrying the seller into believing that a genuine and immediate sale will be lost unless they accommodate the request! It is also a good idea to save one element of your required package to the end of the negotiations and then slip it in almost as an afterthought - for example, “Oh yes, I nearly forgot, we do insist on receiving 60 days credit” or “we do take a 2% early settlement discount, I assume that will not be a problem?” Many sales people, fearful of the lost sale and the associated waste of their time, will not argue the point, preferring to attempt to justify their generosity to the accounts department on their return to the office. ii) Reducing costs Other ways to cut the cost of purchases - if this is relevant to your business type - include:
• Offering prompt payment or cash in advance in exchange for a discount • Ensuring that all quantity discounts are received • Discussing methods of reducing unit costs with suppliers - many will offer discounts if you order in a batch size that is economic for them, or accept delivery on a day that is convenient • Wherever possible, try to obtain samples, or items on approval, to enable you to fully evaluate their suitability - also try to negotiate ‘sale or return’ arrangements, even if they are not (yet!) standard practice in your industry • To avoid subsequent confusion, disagreement and unnecessary expense, confirm all orders in writing, stating clearly the product details, price, credit terms, delivery method, and that ‘time is of the essence’ - the latter statement will usually enable you to cancel the contract without penalty should they prove unable to deliver on time iii) Checking goods Physically check the quality and quantity of items delivered. Sign any delivery documentation with the words ‘received unchecked’ if you are not able to fully satisfy yourself of their suitability at the time of receipt. On receipt of the invoice it is important to fully check its contents since, even in the age of computer invoicing, it is surprising how many errors, usually in the supplier’s favour, they contain. Therefore you should:
• Check the quantities invoiced match those received • Check the price charged matches the price at which you ordered them • Check that no unexpected extras have been added to the invoice for postage and packing etc. • Check the arithmetical accuracy of the invoice, including any VAT • Refuse to accept any invoice which includes VAT but does not quote the supplier’s own VAT number • Send the invoice straight back if it is wrong
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To running your own business iv) Payment When it comes to paying for purchases, do not settle your account until the agreed credit period has expired and you are fully satisfied that the supplier has met their side of the contract. In fact, it is now common business practice to consider taking further credit - especially if there remains some small element of dissatisfaction, such as an invoicing error - until the issue has been resolved to your full satisfaction. However, it is important to recognise that HMRC must be paid promptly, since they can, and will, impose legally binding charges and penalties for late payment. c) Giving discounts Most small businesses don’t realise that their single largest element of cost is one that probably doesn’t even appear in their accounts - discounts awarded to clients. Discounts are a cost in exactly the same way as wages or overheads, and yet even in the biggest companies they are often literally ‘given away’, with little serious thought to their true implications for the success of the business. To manage your discount costs properly you should:
• Monitor the total amount you actually charge your clients as a percentage of total sales value you could have earned if you had billed your work at your full hourly or daily rate. If it is more than 95% you are doing well. But if it is less than 85% you are probably giving away too much, or perhaps your full hourly or daily rate is too high - so it’s best to double check your figures. • Use selective discounts as a strategy to attract new clients and to generate additional sales - e.g. in the form of introductory discounts or discounts that are only triggered once a client reaches a set level of purchases etc. But do not allow your business to get locked in to low prices because of uncontrolled over use of discounts. Remember, low prices can spiral and lead to a lower chance of survival. • Try to link a client’s discount to them giving you a target amount of work, and then present that discount in as favourable a light as possible. For example, when based on a client that you expect to pay you £12,000, a 25% discount on work over and above a target level of £10,000 actually costs your business less than a flat rate discount of 5%. This is because 25% of the difference between £10,000 and £12,000 is £500 - whereas 5% of £12,000 is £600 - so a ‘bigger’ discount can actually cost you less! A 25% discount also sounds more impressive, even though it’s on a much smaller amount - and will certainly help you to stand out from the crowd. It is also highly likely to encourage that client to channel more of their work through your business, in order to trigger the higher levels of discount. The key to the success of this strategy is to set the targets at an appropriate level for each client, so that they find the potential discounts attractive and your business finds them profitable as they generate genuine extra work. d) Managing your budget It is a good idea to prepare a comprehensive budget for your outgoings and to continuously monitor your actual performance against it. If you start to spend more then you planned, then you will immediately be able to investigate and to find out what is going wrong, so that you can get back on track. A properly designed budgeting process can help to reduce your costs, if every item included in the budget has to be justified initially. The alternative, and wrong, way to set your budget is to include everything you spent at last year’s level plus inflation, on the basis that ‘if I spent it last year I must need to spend it this year’! The first principles of budgeting involve answering the following questions about every single element of your costs:
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To running your own business • Can it be eliminated without significantly damaging the profitability of the business? • Is it over-specified for the needs of the business, and could the specification be trimmed to save costs? • Does it cost more than the benefit it delivers? • Can the same outcome be achieved at a lower cost, perhaps by changing supplier? • Can it be done cheaper by an outside sub-contractor? • Can it be done less frequently without harming the business? • How do other businesses achieve the same outcome? • If you were to start in business again would you still decide to incur this type of cost? • Is there any duplication of effort or can the task be combined into one that is already carried out elsewhere in the business? • When was the last time that competitive price quotes were obtained? • Has the choice of supplier become a matter of habit and convenience rather than sound economic sense? Whilst such questions should be asked of all costs, it clearly makes most sense to initially concentrate on the largest elements, since they are likely to have the greatest potential for reductions. When combined with sales forecasts, these cost budgets should also enable you to forecast your cash flow to identify whether you are likely to need an overdraft facility. They will also show you when and how much you may need to borrow, and this will in turn help you to negotiate the necessary facility with your bankers well in advance. Not only does budgeting enable more effective business control, it also creates a very good impression with your bank manager, making him more likely to accept your overdraft request. e) Getting something for nothing Another way to maximise your income is to take advantage of free or very low cost resources that are easily available, if you know where to look!
• Business Link - provides excellent free or low cost training in key business skills such as marketing, selling, negotiating and bookkeeping. They also provide free counselling and support, and are an invaluable sounding board for your business ideas or issues. Visit www.businesslink.gov.uk for more information. • Free consultations - many professionals offer free initial consultations, and you can take advantage of these. But don’t allow them the luxury of using the meeting merely to find out about you and your business without actually providing any advice. In the case of solicitors, the Law Society will arrange a free consultation with a suitably experienced local lawyer if you ring them on 0207 242 1222. • Free banking - if you have decided to open a business bank account, most banks offer new businesses one year’s free banking, providing they stay in credit. We recommend Cater Allen for all business banking, which offers free business banking for the lifetime of the account. Your local bank manager may also be able to offer advice and assistance. However, in our experience, not all managers are equally willing or able to provide cost effective advice and they may occasionally have a vested interest that is primarily in the benefit of the bank. If you have a good bank manager, use them.
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To running your own business • Free books - local libraries should not be overlooked as a source of reference material and trade directories and so on. It is also worth remembering that the libraries of colleges and universities generally welcome members of the public and often contain extremely good business reference sections. • Health & Safety - free advice on Health & Safety considerations, and legal advice on your obligations, is available from the Health & Safety Executive. • Free software - practically free ‘Shareware’ computer software is available for about £3 per programme for a period of license-free evaluation. All types of business software are available, from spreadsheets and word processing to databases and accounts packages. Magazines such as ‘PC Shareware Magazine’ contain full details of products and prices available. • Free accountancy advice - contact Easy Accountancy for helpful and knowledgeable accountancy advice when becoming self employed, whether you are planning to operate as a sole trader or a limited company.
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To running your own business 17. Finding Work and Growing Your Business How you start looking for business on day one will depend very much on your background and what contacts, if any, you already have who may be potential clients. Remember that possible clients could be people that you meet in a social capacity as well as a business one. Never be afraid to drop your services into the conversation at an appropriate moment, whatever the circumstance. Generally, as a self employed person, people are always more sympathetic to your ‘pitch’ than they would be if you were mentioning a company you were employed by. People love entrepreneurs! Start now There are always a million reasons not to do something, but if you don’t take the first step, it will never happen. So don’t wait until you’ve got everything set up - get started right now. And begin by asking yourself the following questions:
• • • • •
Who might be a prospective client? How can I find them? Where do they go, what do they read, which websites do they visit? How should I approach them in order to gain their interest? How do I engage with potential new clients, so when they do need my services, they will instinctively think of me?
The next step is to take action. If you’re a freelance copywriter, get some emails out to local businesses asking if they need someone to write content for them, and start writing a Blog to showcase your copywriting talents. Or if you’re a plumber, target your local area – friends and family who might be interested. Put on some seminars in the local town hall and offer free advice. If those people ever need a plumber, you can be sure they’ll come to you first. Having said that, don’t try to sell to anyone and everyone, find out who your most likely customers are and make sure they are the ones that know about your business first. In amongst all the enthusiasm, it’s important to remember to keep your company lean and efficient and focus your efforts on the things that matter. Don’t waste hours perfecting a website or pay vast amounts of money for CRM systems you don’t need. Focus on your clients and make sure you deliver what you promise, as word of mouth marketing is the most effective and cheapest way of bringing in new clients. Marketing We’ve put together a quick step-by-step guide to successful marketing. It needn’t be as daunting a prospect as you think! 1. Find out who your customers are If you’re going to present a marketing message to someone, you need to make sure it’s the right message, to the right people, at the right time. So define your target audience. You need to put your different customers into groups, for example, if you’re a physiotherapist, who are your customers likely to be? The older generation with back problems? Those who play sports and sustain injuries? Those who work in manual labour? What groups do your competitors target and have they missed any opportunities?
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To running your own business fine your target audience. You need to put your different customers into groups, for example, if you’re a physiotherapist, who are your customers likely to be? The older generation with back problems? Those who play sports and sustain injuries? Those who work in manual labour? What groups do your competitors target and have they missed any opportunities? Group these customers and write down what their needs are and how likely they might be to take up the service - and most importantly, if they can afford it. After all, some groups may really want your product/service but not have the money to pay you, so there is no point in targeting them. 2. Understand your customers and competitors Why do your customers need you? Work out what your groups of customers buy and why they buy it – from this you can work out your Unique Selling Proposition (or USP). Give your business a bit of an edge over competitors by giving customers exactly what they want, but with something a little extra. You can learn a lot about your customers and their needs by talking to them! Get out on the street and question some of your potential customers, ask friends and family or go to events and exhibitions. In order to really make your business stand out, make sure you know who the competition is. You’ll need your USP to be different to their unique offerings, so check out how much they charge, how many clients they have and what sort of business they run. Have a look at their websites to try and get a feel for your competitors’ companies. 3. Work out where your customers are Where are your customers most likely to see your marketing message? Could it be on a notice board in local companies? There are lots of places that don’t charge you to advertise, where your customers will see your adverts. Think very carefully before placing a ‘paid for’ advert, they are expensive and often don’t provide the level of response you thought they might. 4. Write a marketing plan This does seem like a very boring part of the process, but it is important in order to consistently continue marketing and selling the services and/or goods that you offer. Write a detailed description of your customers and describe the marketing activities you’ve chosen, including the timings and cost of each activity. Some of the sort of marketing activities you could include are:
• • • • • • • •
Direct selling – face to face sales. Get in touch with existing contacts – use people you know to help you win business Advertising Events and exhibitions Seminars – introduce your company and give some free advice Small business breakfast meetings PR Internet activity
For more information on each of these marketing activities, have a look at our finding work as a small business and sole trader on our website.
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To running your own business 5. Monitoring and evaluation Don’t just carry out marketing activity and hope that it works – make sure you measure the amount of business you get. For example, you could find that exhibitions give you a lot more customers than advertising or PR. Once you’ve found this out, you can tailor future marketing plans so you spend your time and money most effectively, with a good return.
Basic marketing tools
Anyone considering starting their own business must have enough experience in their chosen field in order to sell their services credibly. But beyond that, the most vital thing is that you look like a professional. Many self employed people run successful businesses using Hotmail email addresses and the like, but you really will create a better impression if you invest in a proper domain name and website. These are not expensive and can be bought online easily and simply, usually with email hosting packages (which you will need) and web hosting packages. a) Website Once you have an email address it is worth investing in a single web page at the very least. Being able to point people at your web page for further information and contact details really helps when marketing your services and also makes you look more professional. If you know someone (or are a web developer!) then this will not be a problem, but if you don’t, then there are a number of good quality low-cost website packages ‘in a box’ out there that will enable you to get up and running. For more information, see the ‘Creating a website for your business’ page on our own website. b) Stationery Something else that will definitely be useful is business cards, for giving to friends, suppliers and industry contacts and for handing out when visiting industry events. Make sure you include a supporting sentence on the card which explains what services you offer, if it’s not obvious from your company name. You don’t need a logo (unless you can get one for nothing or design one yourself!) and other stationery items are not vital either in the Internet age, as all correspondence and invoicing can be done via email. c) Other tools Any other marketing tools, like a brochure or hard copy sales materials, are a nice-to-have but really are not essential. If someone asks for a brochure simply refer them to your web page instead. Further down the line if you really want a brochure then you can choose to have one, but in the short term, there are better things to spend your limited budget on! Your other vital marketing tool will be samples of work and/or client references, but these take time to build up. Make sure you always ask for these and update your website regularly with new work samples (if relevant) and new client testimonials. How to advertise your business When people think of marketing, they always think of ‘advertising’ first. Partly because prior to the Internet and email, traditional advertising was one of the main marketing approaches used. The problem with advertising though is that it is inherently expensive, and it’s also very hard to track results. For example, if you run an advert one week in the local paper you have no real idea of whether it made a difference, unless someone calls and says ‘I saw your ad in the paper’, which many people do not. You might notice a dramatic increase in the number of inbound enquiries during the same week, but in reality, this is very unlikely. Think about it from the other side of the fence. How many times do you see a single advert and act on it immediately? ‘Almost none’ is probably the answer, which begs the question – ‘Why do companies advertise?’
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To running your own business In short, what is known as ‘off the page’ press advertising is generally considered to be a brand awareness activity rather than a lead generation activity - as in, it will raise the profile of your company name in a more general way, but you are unlikely to see a high number of new business enquiries generated solely as a result of your advertising activity. Here are some tips on how, and where, to advertise along with the thought process behind it. Where to advertise Before you decide on this, you first have to be absolutely sure you have defined the following:
• • • •
Who is your ‘target consumer’? What is your advertising budget? What publications are most commonly read by your target customer? What websites are most commonly used by your target customer?
The next step is to carry out your own research into relevant websites and magazines, and to try to match their readerships as closely as possible with your target consumer. If there are many suitable ones, then look into readership statistics or the number of website members, as this can also help you to determine which options are the most popular. At the same time, think about more ‘local’ advertising as well, if this is relevant to your business. That could include the local paper, but also websites like www.yell.com and so on. Types of advertising Once you have decided how to reach your potential customer, the next step is to look at what options are available with each of these ’publications’ - using that term to describe both websites and hard copy magazines or newspapers. In fact, many industry-focused hard copy magazines will also have a supporting website, so sometimes you can work with both if that’s an option. Hard copy publications - Taking these to start with, they usually offer everything from a full page ad (with higher rates for front/back covers, inside covers and so on) down to half or quarter page, or even what are known as ‘footer strips’ which are just a 1” deep approximately and run along the bottom of a page. Costs then vary of course depending on how much of a page you buy. As well as the ads in the main publication, which are usually referred to as ‘display advertising’, some publications also run what they call ‘classifieds’ at the back - which is more of a ‘services directory’ and is usually cheaper. Classifieds are often sold by the column width and then by depth in inches – hence the phrase ‘column inches’ which you may have heard. To get an idea of costs, the best place to start looking is the publication’s website, which will probably include something called a ‘media pack’ that can be downloaded as a PDF. If you cannot see this (they are usually in a section called ‘Advertisers’) then email the publication and ask for one to be sent to you. Again, there should be an advertising contact on the website. It’s also worth requesting a sample publication or two at the same time. Be aware though that the moment you show an interest in advertising space, an ad sales person will be on the phone straight away. Try not include a phone number, and always specifically request that they reply by email rather than calling you. Once you have the media pack it will give you details of the costs for each type of ad space they offer, often including both hard copy and Internet where relevant. Do not be put off by the prices quoted though, as these will be what is known as ‘rate-card’ - and no-one ever actually charges the rate card price. As soon as you get into conversation, an ad sales person will immediately offer a reduced rate for ‘first time advertisers’ – which funnily enough is also usually available for ‘repeat advertisers’ as well!
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To running your own business The key thing to note here is that one-off ads are always far more costly per unit than if you run a series, but that of course all comes down to budget. Having said that, it is a proven fact that a series of ads over a number of weeks or months, does indeed produce better results than a one-off advert. Sometimes it takes time to build up recognition within your audiences, and after they have seen an ad a few times they are more likely to act on it – but the same concerns about response still remain. As we mentioned before, you should see this type of advertising as a supporting mechanism to other forms of marketing, and more as ‘brand awareness’ than anything what will generate direct business. Something else to think about is that publications will often publish a ‘Forward Features List’. This basically tells you what some of their main features are going to be over the coming months. As such, it’s definitely worth trying to tie in your advertising with issues where there are relevant features that your audiences is going to be interested in. At this point you can also ask if your ad can actually appear within or very near the feature. As well as deciding on what size ad to run, also think about position. The earlier in the publication the better – and one on the right hand side of a double page spread always stands more chance of being read than one on the left hand side. When you are close to booking, sometimes you can ask for these options (known as ‘early position’ and ‘right hand facing’) to be guaranteed as part of the negotiation. One final thing to note, when budgeting for an advertising campaign, remember that you will also have to pay to have an ad designed and created as artwork, in a format that the publication requests. Online advertising – In terms of finding the right websites to advertise on, and then gathering costs and options, this is very similar to advertising in hard copy publications. But that’s about where the similarity ends. With online ads there are usually far more options open to you – and they are almost always far more cost-effective as well - and more ‘trackable’. The best known ad options are the horizontal ‘banner’ along the top of the website or a vertical ad down the right hand side. These are known as banners and towers respectively. Some websites will also offer panels of advertising at various other locations on a page, and these come under a variety of different names. The key thing is that, when talking through the options with an ad sales person, don’t be afraid to ask questions or ask for clarification if they are using ‘jargon’ or talking about things which you do not understand. Having decided on the type of ad, the next thing is whether you want it on the Home page, or whether a different page or section is better. For example, the whole site might not be 100% relevant to your target customer, but a particular section on it may be – in which case, this is where you want your ads to appear. This is sometimes also cheaper as well. Following this, you then want to think about how long you will run an ad for, and this is usually down to budget. Most websites request a minimum of two weeks as this makes it easier to manage updates. The other thing to note is that usually the space is not sold 100% to one advertiser. For example, if you buy a banner on a Home page, they will probably sell this to four or five advertisers, and the ads will then ‘rotate’ so each one is seen while a visitor is on that page. It’s quite normal though, so not something you should be concerned about, and is done to ensure that the page remains interesting for the visitor. Do check though what their maximum number of advertisers is at any one time. It really shouldn’t be any more than five. As with hard copy advertising, remember that these ads will have to be created as Gif files to the website’s specifications in terms of physical size and file size, so budget for this also. Lastly, don’t forget that these types of ads can include a hyperlink to your website, so remember to specify where you want the visitor to go if they click on the advert. The publication should then be able to tell you the number of ‘click-throughs’ you received as part of their service.
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To running your own business At the same time as looking for advertising on the main website, many sites will also try to offer ads on any newsletters or other communications that they send out to their membership. These can be a really good way of generating extra interest as it is not reliant on that person visiting the website. Instead, they will usually have ‘opted in’ to receive a weekly or monthly newsletter, and then you could have your banner ad at the top of that – delivered directly into the recipient’s Inbox. This is definitely worth considering. Creating your advert As we are all aware, the big London ad agencies will charge millions to create ads for top name brands which they think will generate the most response, and/or ‘retention’ as they call it. Which basically means, when asked, do people remember seeing the advert? Of course, not everyone has a massive budget for developing these types of ads, so we have to think a little smaller. But many of the golden rules still apply:
• Make it memorable – humour works well here, as long as it’s not politically incorrect. • Keep it short and sweet – entice them to find out more, don’t write War and Peace. • Include a ‘call to action’ - make sure they know what to do next if they are interested, and make it easy to find and as memorable as possible. • Don’t make statements which are not true – no point gaining their interest with something that you then cannot deliver. • Include an offer or a discount if you possibly can - make this ‘time limited’ so they act sooner rather than later. The ad guys call it a ‘compelling event’ – what can I do to make someone act NOW? If you follow these rules you will not go too far wrong – whether you end up designing and writing your ad yourself, or working with an agency to do it for you. Not all agencies are expensive, and there is always the option to find a design student just out of college, or someone just setting up as a freelancer, who may be brilliant and is looking for work to develop their portfolio. Hard copy ads involve creating a design and then artwork to the advertiser’s specifications. Once you have booked some ad space they will normally send you what are known as Technical Specifications or ‘Tech Specs’ and you’ll just need to pass these on to the person that is creating the artwork. This used to be a complicated process, but with developments in technology over the last few years, most publications now simply ask for a print ready PDF with crop marks. For online, the publication will want a Gif file and will ask for it to be created at a specific number of pixels wide and deep. This can usually be either ‘static’ or ‘animated’, in which case you have the option to change the message or the images two or three times while the ad is visible. All sorts of fun options are possible here, and there is usually no more cost for space when you’re running this type of ad – although it will cost a bit more to produce. Remember though that only one ‘click through’ destination URL can be included, so it must relate to all of the separate ‘screens’ of your animated advert.
How to get to number 1 in Google (this is obviously a guide and not a guarantee)
To appear on the first page of a ‘natural’ Google search – and even better, at the top of the list – is the holy grail of marketing. Crack this one and you are sorted. Of course, it’s not that easy. Especially when the product or service you are selling is not unique, with many other companies out there trying to do the same thing. The reality is that there is only one ‘top spot’ every time someone searches, and it’s not necessarily going to be you.
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To running your own business So what can you do to improve your chances of appearing near the top of the page? You can start by understanding Search Engine Optimisation, most commonly known as SEO. SEO can be defined as the activity of optimising web pages or whole sites in order to make them more search enginefriendly. Search engines are text driven so by understanding what items are most important and what search engines look for will give you a greater chance of being number one in search results. Here are some handy tips which we’ve picked up along the way: Competitor Research If you want to beat the competition on Google, this is an essential first step. You need to define exactly what it is that you are offering to your customers, and then identify other companies on the Internet who are offering the same. Of course, there will be many (unless you’re offering a REALLY unusual service) – but there are ways to narrow this down. For example, if you only really operate in a small geographical area, or your business is targeted at a specific niche or sector. Once you have identified a selection of competitors, look closely at their sites – but remember to think of yourself as a potential customer and not as a competitor. This will enable you to assess their strengths, but also their weaknesses, both in terms of what they actually offer and also in terms of how they present themselves via their website. This will help you to make any changes to your site that you think will ‘give you an edge’ should a potential customer be choosing between the two of you. The next step is to see what they are doing in terms of SEO. If you found them, then chances are they are doing something right. Look at the titles of each of their pages – both on the page and in the browser bar in the top left hand corner. See whether they are running any ‘Pay Per Click’ activity and hence appearing in sponsored links as well as natural searches. All of this will help you to assess what you are competing against when someone is trying to find your services – and will enable you to make sure that it’s you they choose. Keyword Research You will have heard people talk about ‘keywords’ in relation to search engine optimisation (SEO), but it’s amazing how many people don’t really know what this means, or how to use them properly. A ‘keyword’ – or in fact ‘key phrase’ – is a word or phrase which someone might search on when looking for what you are offering. For example, ‘photographer in Basingstoke’. It seems obvious, but the human mind is a strange thing, and it is often the case that the search phrases people use are not always what you might expect. One of the most common mistakes people make when trying to determine what keywords they should use, is to assume that they know how their customer audience thinks. By not carrying out this vital research phase, it is easy to miss some of the most effective and powerful keywords. We guarantee you’ll find that some of them are ones you would never have even thought of. The other thing to remember when selecting keywords is that you are not just looking for words and phrases that will get people to your site – in effect ‘shop window browsers’. You want to attract people who are actually in the market for your services. Using a consumer example for a moment, someone who searches ‘deep fat fryer’ could just be having a look around to see what the options are, whereas someone who searches ‘Tefal Actifry’ knows they want one that uses little fat – and someone who searches ‘cheapest Tefal Actifry’ or even ‘buy Tefal Actifry’ is most likely to convert to a sale. So if people find you using such specific keywords, the chances are they are more likely to convert to being a customer.
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To running your own business Page Titles Page titles are one of the most powerful SEO tools, yet are often completely overlooked. Getting your page titles, and most importantly your Home page title, right is vital. Each page title should begin with your strongest keyword for that page, not with your company name. It’s not about who you are that matters, but instead about what you offer. Potential customers know what service they want – but at this point they don’t know specifically about you, so there is no point using your company name as part of your keywords. Unless you are hugely successful of course! The other thing to remember is that Google listings only display 66 characters (including spaces) for a page title, so make the most of every one. Meta Descriptions This is a short paragraph of text which describes your site, or a page on your site. It sits within the page code and is only visible to search engines, but Google will display this paragraph as part of the search results, under the page title. By writing these ‘meta descriptions’ specifically for each page, you can ensure that anyone scanning a list of results is seeing exactly the information you want them to see about your company. Without this meta description, Google will use the first few words of your web page – which may not necessarily provide the information which the searcher needs in order to decide to click on your website. In effect, the meta description acts like a little advert, so use it to give the searcher a clear and concise summary of what you offer. Remember also that any keywords you include in your meta description should match the ones in your page title and in the content of your Home page. Google only allows 150 characters including spaces for meta descriptions so make sure you work to this, or it may well truncate your description, cutting you off in mid-sentence. Headings and sub-headings At the very least, these are important for breaking up content on your website and making it more ‘scannable’ and easy for your visitors to read. Main headings and subheadings are also important for SEO. Google uses headings to help it understand the content of your site, specifically in relation to what is known as ‘relevance’ – as in, how relevant is this website to the phrase which someone has just searched on? Make sure that every page on your website has a main heading and a series of subheadings, and that these headings include your target keywords wherever possible. More on relevance This is worth expanding on a little more. Over the years people have tried to ‘get clever’ with the use of keywords, in an attempt to drive more traffic to their website, even if that person was not really looking for what they offer when they started searching. For example, if you are a business selling patio heaters, it is reasonable to assume that if someone searches on ‘garden furniture’ they might be interested in buying a patio heater as well. So you add ‘garden furniture’ to your keywords and sure enough – you manage to make yourself appear on the first search page. At this point the searcher could opportunistically think ‘ah yes, I need one of those as well’ (as the company hopes they will) or they could equally just get frustrated that their search brought up something which was totally irrelevant to them. Google realised that this was happening and decided to toughen up the rules a bit, to ensure that it’s ‘customers’ – the searchers – got the best possible user experience. As such, Google’s algorithms now assess keywords and phrases for ‘relevancy’ in relation to your website’s content, and if they feel the site is not relevant to what the searcher was really looking for, they will stop the site from appearing in that set of search results. Repeated use of this approach can also result in a website being ‘blacklisted’ by Google, if feels that the site owner is trying to drive traffic to it by unfair means.
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To running your own business File Names The names which you apply to your images, media and web pages also need to be optimised, by using your keywords within the file names themselves. For example, if one of your key phrases is ‘wedding photography’ you should save any sample images used on that page as ‘wedding-photography-01.jpg’ and so on. This helps search engines to understand what that image file contains. The same applies for the file name of your web pages, as many search engines now look for keywords within the URL as well – these are known as ‘inurl:’ searches. Visitor Sitemap This is a web page that holds links to all the pages on your website, in a ‘directory’ format. Sitemaps offer a valuable alternative navigation option for your visitors, but more importantly they can also be valuable for SEO. Sitemaps do exactly what a map should do - help search engines to ‘find their way around’ your website more easily! This also increases the chances of all your pages being properly indexed by the search engine. Sitemaps should appear with sub pages ‘indented’ on the list, in a way that reflects the exact hierarchy of the site - and all headings should be linked to the relevant page. Page name information should be in text, not images, and no two pages on the sitemap should have the same name - as this can confuse both users and search engines. Keyword Density As you will have seen from this article so far, there are many text elements within a web page which counts towards the overall ‘keyword density’ of the page. These rank as follows in terms of importance for SEO:
• • • •
Page title Meta description Headings (using ‘H1 tags’ or similar) Alternative image descriptions
You need to ensure that your Home page contains content that is keyword rich, but without making the visitor aware of this. There are many sites that you will see where it’s obvious that SEO has taken priority over ‘readability’ and often the site, especially the Home page, start to make no sense at all! It’s a fine balancing act between the two, and one which it is vital to achieve. Further to this, Google now also penalises sites which have content that was obviously written to attract search engines and not to attract human beings! With the Panda update, it cracked down on sites with thin, stolen or duplicate content, which means that original, fresh copy is key and the same-old content ripped off another site is going to see your website penalised in the search rankings. Then with the Penguin update, Google also aimed to eradicate the majority of the bad content away from the top of searches and penalise poor content which is written purely for search engines, instead favouring ‘purely original, unique and engaging sites with up to date, fresh content’. Your chosen key words must also work alongside the other elements of your on-page SEO, to help search engines identify your site as highly relevant to those keywords, which – as described above – will help to increase your rankings for them. Link Descriptions When you place hyperlinks to either internal or external web pages on your site, you must make sure that you give the search engine a description of that link. As we’ve already explained, Google likes to understand the relevance of a link and will then give it a ‘link score’.
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To running your own business For example, on your Home page you might have a panel with a wedding image and a graphic underneath with says ‘Click here to find out more about our Wedding Photography services’, with a button to click. That button is a link and must have a description which enables Google to determine if the visitor will find relevant content by clicking on it, so make sure you include the phrase ‘wedding photography’ in the name of the button graphic. Likewise, when you’re hyperlinking words, make sure you use the words themselves as the link description. Going back to the phrase above, the link should work like this – ‘Click here to find out more about our Wedding Photography services’ – and not like this - ‘Click here to find out more about our Wedding Photography services’. With the first option Google can immediately see what the link is about. Pay Per Click Otherwise known as ‘Google Adwords’, this is in effect an advertising campaign which enables you to pay to appear on the first page of a set of search results, but in the ‘Sponsored Links’ sections at the top and down the right hand side. A PPC campaign is set up using much of the same information as we have already described – keywords, relevance and so on - with the only difference being that you agree to pay a set amount for every ‘click through’ to your website from a sponsored link. Hence the name ‘Pay Per Click’. All of the same rules regarding relevance apply, and if Google thinks that your ad is not relevant to your websites – and hence is not driving the searcher to a site that is useful to them - it will drop it further down the list, and even off the first page altogether. Google decides how ads are rotated to give everyone a chance at the ‘top spot’, but again the weighting of this can be affected if your ad is not relevant to your site. There is far more information on PPC which is not covered here, but if you carry out all of the other activity described in this article, chances are you won’t need it. Some tried and tested tips We’ve been supporting small business owners for many years, and in that time we have learned a few things about what makes a new business successful. Here are some of the most common ones: a) Renew old contacts - Think about anyone you have ever worked with in the past, or met through someone else, who may be a possible client. Track these people down via phone or Internet - LinkedIn is brilliant for this - and get in touch. Start with an email explaining that you have set up as a freelancer and ask them to bear you in mind if they have a requirement. Or pick up the phone if you’re brave enough! Not all people like to be called out of the blue, so an email can often be a softer approach, but sometimes a call really does do the trick. It depends on your past relationship with that person and which you think will be most effective. b) Work for free if necessary - A horrible thought we know, but if you are just starting out, then it’s vital that you build up a credible client base, and examples of your work, as soon as possible. To get your first job on board it may be a case of contacting someone you know well and offering them a free or heavily discounted service - in return for allowing you to mention them as a client, use them to write a case study about what you did or show examples of the work you produced for them when pitching for other new business. Prospective clients will always feel more comfortable about using you if you they do not appear to be your first one! c) ‘Network’ with a capital N - The more people who know that you are out there, the more chance you have of generating business. Investigate local networking groups, breakfast clubs and the like, or industry-specific events if you are aiming your services at one particular market sector. A trade event is a perfect opportunity, where many prospective clients are all gathered in one place on their exhibition stands with nowhere to escape to when you approach them, business card in hand.
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To running your own business Beware about spending too much on exhibitions though, they can cost a small fortune, use up lots of collateral and remember there’s a good chance your competitors will also be there, so prospective clients may struggle to remember who they actually saw a few days later. Another great way to generate business is through your suppliers. That might sound odd but it isn’t. Build up your network of suppliers from existing contacts and new research, they will all be very happy to talk to you as you are, in effect, a route to market for them. If you develop a good working relationship you will become a virtual part of their sales team, bringing in new business with no cost of sale for them. But the flip-side of this is that they will also uncover business opportunities for you. Forums and discussion groups are also a good way of promoting your services, although you have to be subtle, as you will be ‘struck off’ if the moderators think you are trying to sell via this route. Instead, make a point of engaging people who look like they might be potential clients in conversation, answering their questions and generally giving good advice. This could lead to all sorts of interesting conversations, by which time they will have got to know you as a source of trusted information. d) Set up directory listings - Despite the number of self employed people looking for work, it is often difficult for clients to find suitably qualified and experienced suppliers. To address this market, there are now a few well regarded forums and websites that allow you to post a professional profile listing your skills, credentials and experience. We can’t guarantee you’ll find all of your work this way, but it can only help. e) Forum blogging and networking - A new revelation to marketing, forum entries and blogging has become one of the cheapest and best ways to acquire new clients. To appeal to clients you need to appear as an expert in your field – through writing a blog you gain credibility within your industry. Make sure you keep the content of your blog relevant and interesting – keep up with changes in your industry and development in the skills that you can offer. You’ll find that if you’re interested in the services you offer, others will be too. There are lots of forums out there talking about everything from financial advice to your crisp flavour preference. Chances are, people are talking about the goods or services that you offer. Get online, search for these forums and start posting away. Don’t just market your services – offer advice and helpful tips. This will build you a name in the industry. f) Use social media channels - Once you have a website you can start to drive traffic to it, and one way to do this is to make people aware of your services via social media channels such as Twitter, Facebook and LinkedIn. If you are self employed, you may feel that LinkedIn, being well known as a ‘business’ networking site, is the most beneficial of all of the social media channels. However, Facebook now offers the opportunity to set up a business page rather than a personal one, and Twitter is being used more and more by large businesses to keep in touch with their customers - so both of these should be investigated as well. g) Focus your efforts - As you start to build up a client base, identify those clients which are most profitable for you and concentrate your marketing efforts on trying to repeat or replicate them. Too many self employed people persist with low value clients, sometimes out of a misplaced sense of loyalty or optimism, but more often because they don’t realise that they could be earning more money elsewhere. h) Value your existing clients - The easiest people to sell to are your clients, and there are many statistics available regarding how much easier it is to sell to an existing customer than to find a new one. Your customers are probably the biggest asset to your business - so be sure that you ‘use them, and don’t lose them’. On that note, referrals are the cheapest, and usually most potent, form of marketing for a self employed business owner and must not be left to chance. Encourage your clients to refer or recommend you to their sister companies, suppliers and contacts.
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To running your own business i) Be flexible - It’s important to find out what potential and existing clients actually want and, if necessary, adapt your service so that it matches those needs more closely - rather than being just the service that you are prepared to offer. For example, if a client wants you to work outside normal office hours, to provide your own equipment, or to offer a total satisfaction guarantee - try your best to give them what they want. You’ll be streets ahead of the competition, and you may even be able to negotiate higher rates.
Sales
Every company needs to generate sales, so we’ve put together a few tips on how to make a sale. If you run a service based business such as a consultancy, this should be really useful - but if you sell goods, or services like plumbing or nannying for example, this section might not be so relevant. Step 1: Lead generation Choose which people you’re going to target and make sure you know who the decision maker is. For instance, if you’re selling IT equipment, make sure you get the name and contact details of the IT Manager. Contact this person – don’t just send them an email or letter. Call them! Yes it’s tough but it is without a doubt the least expensive and the most rewarding way to get new business. If you’re just starting out, use existing contacts, friends and family. Also look on the internet for local businesses you might want to target – if you’re selling consultancy, look for small local business that might need some help. Keep an eye on the trade press and make sure you attend relevant exhibitions – you could meet some great customers! Step 2: Set up the sales appointment If you don’t know the contact at all – it’s best to call them. This sounds scary, but you will get a much better response rate if you make the effort to call. For more tips on cold calling, have a look at our finding work pages. When you speak with the contact, set up a date to meet up rather than sell over the phone. Face to face selling is much more effective. Step 3: The sales appointment Make sure you prepare and have a good idea about their business. Put together a list of questions so you can get a conversation going and tailor your businesses services/goods so that they directly meet this customer’s needs. Be friendly and open to questions – the more the potential customer likes you, the more likely you are to make a sale. Step 4: Closing the sale Your heart will probably be beating a bit faster when you get to this stage of the sale, and it’s easy to just want to ask whether the customer wants to buy or not straight away. But don’t! Closing a sale is a tricky business, and if you go in too quickly you could ruin the chance to do business with this customer. You’ll know when to start ‘closing’ if you feel like the customer is interested, so look for signs like a nodding head, a positive tone or lots of questions. Reassure the customer that they’re in safe hands and start to ask closing questions like ‘What sort of consultancy services are you looking for?’ or ‘Would you like that product in blue or green?’. It’s hard to tell you exactly when the time is right to ask whether they want to sign on the dotted line, you’ll need to gauge the right time for yourself and it will be different in every case. Sales and marketing is a tricky business and new business owners don’t always get it right the first time. Keep getting yourself out there and you’ll definitely start to sell your products or services.
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To running your own business How to Generate Leads for Free
What can you do to put yourself in front of potential customers for FREE? This is actually pretty simple once you know what to do. Whether you own an ice cream van, a local restaurant or are a self employed beautician - you know you’re good at what you do - otherwise, why would you be starting a business? This section is especially relevant if you are selling to individuals (or ‘consumers’ as they are know) and will be less relevant if you are selling to businesses. Think for a minute about where you can find potential customers, as they really are everywhere! They could be employees of local companies. They might attend local churches or social clubs. They could be in shopping centres, homes for the elderly, schools or colleges. In fact, your customers could be anywhere. But they do meet up in certain places, so rather than trying to get your customers to come to you - why don’t you promote, demonstrate or exhibit where they meet up. So how can you get these people interested in you? They all may have a need for your services, but don’t quite know about you yet. Here’s the solution - set up demonstrations, lessons or sampling sessions at the places they work, play, shop and meet. Contact the places you would like to run these and then explain what you would like to do to the receptionist, HR manager, social secretary and so on. Then ask them to send an email around explaining what you are going to do and also see if you could drop off a poster to advertise the event. For example, if you own a local restaurant, you could take in samples of food to hand out or give out discount vouchers. Then when these people are thinking about going out to eat they’ll remember your amazing food and will come to you for dinner. If you are a hairdresser, you could do a demonstrations and talks on things like ‘How to look after your hair better’, ‘How to professionally blow dry your hair’, ‘How to choose the right hair colour’ or ‘Why not to cut your own hair’. Then when these people need a hairdresser they will naturally think of you. If you’re a plumber, you could do a demonstration or talk on things like ‘How to fix a leaky tap’, ‘How to reduce your energy costs’, ‘How to replace a washer on a tap’, ‘How to operate your heating most efficiently’ and ‘What are the most common boiler issues?’ Then when these people need a plumber it will hopefully be you that they pick up the phone to. Demonstrations, lessons or sample sessions in and around your local area are something that other companies might not think to do, so this could give you a real edge over the competition. Your time is in effect free, and social clubs, local companies and so on are usually more than happy for you to demonstrate your services. The people watching or attending usually love to see something new, and it’s a great way to get you and your businesses name promoted locally. Remember to have plenty of business cards with you and be prepared to talk to clients after the demonstration. Be open to offering discounts in return for a testimonial for your website and remember to be confident - don’t ever forget you are the expert, you know what you are talking about, so being yourself is just enough! For more information on generating free leads why not watch our video on ‘How to generate leads for free’. Please click the image to watch the video.
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To running your own business
Time management
One last, but important, piece of advice. Time is perhaps the most misused and misunderstood asset of all in many businesses. And given that a salary of £25,000 per annum equates to about 24p a minute, inadequate time management can be costly to your business. Poor time management also robs you personally of something totally invaluable - your own time. A large number of time management systems and tools have been developed and a great many books written on the subject. However, the essence of most of them can be distilled into the following three stage approach. Firstly, understand how you currently spend your time, perhaps by keeping a detailed diary over a period of a week. Next, analyse which of those activities add the most value and profit to your business and those that add the least. Then last of all, devise a strategy to ensure that you focus your time and efforts on the former and not the latter. This ‘time management strategy’ is likely to look something like this:
• Use some form of priority action list - perhaps prepared at the end of the day, outlining the tasks which must be accomplished the following day • Tackle priority tasks first – take care not to fall into the common trap of doing the most enjoyable tasks first • Persevere at the task until it is finished - constantly stopping and starting a task is a classic symptom of time-wasting • Avoid paper-pushing - deal with each piece of paper and its related action only once • Use both telephone and email as much as possible - both involve far less time than face to face meetings, and emails also provide proof of anything agreed verbally Good luck, and remember to keep trying new things even when you have lots of work on. You always need to be thinking ahead! And don’t feel downhearted should you get turned down for a project. Just keep building up your examples of past work and making people aware of your existence.
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To running your own business 18. Managing your pricing When you first start out in self employment it can be incredibly hard to set a price for your time, especially if you are simply not used to charging for your services. You feel bad about charging too much, but at the same time, if you charge too little you cannot afford to support yourself. So setting your charging price is probably the single most important, and difficult, decision that you will make for your business. a) Setting your pricing As a self employed person, you need to offer your clients a high quality service with unparalleled standards of customer care, at a price that is fair - understanding that ultimately, you cannot compete on price with larger organisations. You must also ensure that you do not project yourself as being ‘cheap’, as that has all the associated connotations of also being ‘undervalued’. Instead, you must emphasise and market your quality, service and longterm value for money. Many self employed people are selling their time as a service, so the rate you need to determine is for an hour or a day of your time. The best way to do this is to do some ‘market research’ and to determine what your competitors are charging for similar services. Once you have a bracket, and that could be quite a wide one, pick a figure somewhere in the middle that you believe is comparable with your nearest competitors. Unsuccessful self employed people tend to believe that, as relatively low cost newcomers to the market, the only way that they can fight for a share of that market is by undercutting their competitors’ prices. As a result, they often adopt pricing strategies that reinforce the ‘undervalued’ image, preventing them from winning quality clients and ultimately ending up with a ‘low sales and low profit’ business that could struggle to survive. You may also want to consider offering a lower hourly rate if someone books a day of your time, so for example, if you work on a seven hour day and charge £50 an hour, you may offer a day at £320 or even £300 instead of the full £350. Another thing to bear in mind is that, if you are working remotely and not in a client’s office, only you will know how long you spent on something. As you become more and more proficient at what you do, you may find that you can work more quickly than a competitor, so even though you would both charge a day of your time for a comparable piece of work, you may complete it in less time - in effect increasing your ‘hourly rate’ for the time actually taken. b) Justifying your prices You must be prepared to justify your rates. This involves knowing the rates of your competitors for the work, and demonstrating the savings and benefits from using you, rather than another freelancer. You can show a client that your service is hugely superior and therefore slightly more expensive because, for example, you:
• • • • •
Have a better CV Have done identical work before Have exactly the right skills Work quickly and accurately Have impeccable references
If your rate does become a key issue in negotiations, emphasise that what you are selling is a high quality service that exactly matches their needs, and not a cheap and cheerful short-term ‘fix’ that they may live to regret!
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To running your own business If you are forced to reduce your overall price for a piece of work in order to win a new client, it is always better to offer to do it in a reduced number of hours for the same hourly rate than to reduce your hourly rate. Once you have done this, is it very hard to put it back up again for the next project - but if you only reduced your time quote, then the next time they will have seen what a good job you do and will be happier to pay for the hours you quote, at your normal hourly rate! c) How to raise prices If you are locked into low contract rates there are a number of techniques that you can use to raise your rate without losing your client:
• Be prepared to explain why your prices have risen - for example due to inflation, or the increased costs of items you have to buy in, on order for you to be able to deliver the services that you offer. • Consider some ‘non-price’ price increases such as charging for travelling, out of pocket expenses, the hire of any special equipment you provide and insurance etc. • Introduce a surcharge for any ‘special work’ - e.g. at anti-social hours, or requiring special tools or skills, or work that requires you to carry out private research or training. • If you are paid by the hour, make sure that you have an accurate method of recording all the time you spend on a contract - the best way of doing this is by keeping a daily time-sheet and accounting for every minute between when you start work and when you finish. • Negotiate yourself out of having to do those time-consuming tasks that are of only limited value to the client, and for which you are not adequately rewarded, but only pass on some of the time-saving in terms of lower contract price - the net result should be that you get paid more for every hour of effort. • Consider charging interest when your clients don’t pay you on time.
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To running your own business 19. Guide to HMRC Forms 64-8 SA1 VAT1 VAT600 VAT100 VAT 101 SA100 VAT7
Form to authorise HMRC to provide company details to your accountant HMRC form to register for self assessment VAT Registration application form Flat Rate VAT Scheme application form Quarterly VAT Return VAT EC Sales List – for reporting sales to any EU Customers Self Assessment Tax Return VAT Deregistration Form The following are only relevant for Limited companies
AA01 AD01 AP01 AP03 TM01 TM02 CH01 CH03 AR01 DS01 SH01 CT41G CT600 P11d P11d(b) P14 P45 P46 P60
Companies House form to change the year end date of the company Companies House form to change the registered office of the company Companies House form to appoint a new Director Companies House form to appoint a new Company Secretary Companies House form to remove a Director Companies House form to remove a Company Secretary Companies House form to change any details of a serving Director Companies House form to change any details of a serving Company Secretary Companies House Annual Return Companies House form to strike a company off the register Companies House form to issue additional shares in the company New Company Enquiry form issued by HMRC shortly after the company has been formed. This advises the Revenue who the directors are etc. Penalties may be charged for late submission Company’s Corporation Tax Return submitted annually. The form is due within twelve months of the year end Annual statement of benefits and expenses paid to each director and most employees Annual company declaration that P11d’s have been filed Annual statement for each employee provided to HMRC by the employer Leaving statement of payments and tax deducted from an employee Notice to complete if you do not have a P45 Annual statement for each employee provided to the employee by the employer
We hope you found this guide interesting and useful, if you have any questions about being self employed or would like any further advice please call us on 0500 234111 or 01442 275767, or email heather@easyaccountancy.co.uk.
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To running your own business About Easy Accountancy Easy Accountancy uniquely offers a low priced fixed fee accountancy package with a friendly approach. Specialising in offering accountancy services to the Self employed, Freelancers, Sole Traders and Small Business owners. Our approach towards our clients is very simple, we remove the stress of managing your finances, leaving you to concentrate on making a success of your business. We understand that administrative responsibilities such as managing your business finances or completing Tax Returns can be a real burden. Our aim is to make your life easier by taking on the very tasks which can sometimes make the decision to start a small business a difficult one. Our accountancy package includes:
• Unlimited telephone and email access to your own dedicated accountant - no call centres, no outsourcing and no ‘press one for this or two for that’. • An all-inclusive package starting from just £30 plus VAT per month - covering all your business and personal tax needs for a fixed monthly fee which is one of the lowest in the market
Each of our fixed fee packages is tailored to your needs. For example, you may not require a payroll service or a VAT return but would still like accounting support and tax advice throughout the year plus your annual return completing. Whichever package you choose, you can guarantee, our low-cost, all-inclusive fixed monthly fee means that you’ll never have to worry about any additional costs, so you can call your accountant for advice and never have to worry that you could receive an unexpected bill for the privilege afterwards. If you have any questions about our service or would like any further advice please call us on 0500 234111 or 01442 275767, or email heather@easyaccountancy.co.uk.
Easy Accountancy
Nationwide, low-cost, friendly accountants
Speak to one of our friendly accountants: 0500 234111 | info@easyaccountancy.co.uk
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Easy Accountancy
Nationwide, low-cost, friendly accountants
Telephone: 0500 234111 email: info@easyaccountancy.co.uk